NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
News Corporation (together with its subsidiaries, News Corporation, News Corp, the Company, we, or us) is a global diversified media and
information services company comprised of businesses across a range of media, including: news and information services, book publishing, digital real estate services, cable network programming in Australia and pay-TV distribution in Australia.
During the first quarter of fiscal 2016, management approved a plan to dispose of the Companys digital education business. As a
result of the plan and the discontinuation of further significant business activities in the Digital Education segment, the assets and liabilities of this segment were classified as held for sale and the results of operations have been classified as
discontinued operations for all periods presented. Unless indicated otherwise, the information in the notes to the Consolidated Financial Statements relates to the Companys continuing operations. (See Note 3Discontinued Operations).
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company, which are referred to herein as the Consolidated Financial
Statements, have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these Consolidated Financial Statements. Operating results for the interim period presented
are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2017. The preparation of the Companys Consolidated Financial Statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts that are reported in the Consolidated Financial Statements and accompanying disclosures. Actual results could differ from those estimates.
Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are
accounted for using the equity method. Investments in which the Company is not able to exercise significant influence over the investee are designated as available-for-sale if readily determinable fair values are available. If an
investments fair value is not readily determinable, the Company accounts for its investment under the cost method.
The consolidated
statements of operations are referred to herein as the Statements of Operations. The consolidated balance sheets are referred to herein as the Balance Sheets. The consolidated statements of cash flows are referred to herein
as the Statements of Cash Flows.
The accompanying Consolidated Financial Statements and notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2016 as filed with the Securities and Exchange Commission (SEC)
on August 12, 2016 (the 2016 Form 10-K).
Certain reclassifications have been made to the prior period consolidated financial
statements to conform to the current year presentation. During the three months ended September 30, 2016, the Company reclassified its listing revenues generated primarily from agents, brokers and developers from advertising revenue to real estate
revenue to better reflect the Companys revenue mix and how management reviews the performance of the Digital Real Estate Services segment.
The Companys fiscal year ends on the Sunday closest to June 30. Fiscal 2017 and fiscal 2016 include 52 and 53 weeks, respectively. All references to the three months ended September 30, 2016 and
2015 relate to the three months ended October 2, 2016 and September 27, 2015, respectively. For convenience purposes, the Company continues to date its consolidated financial statements as of September 30.
5
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Recently issued accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from
Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 removes inconsistencies and differences in existing revenue requirements between GAAP and International Financial Reporting Standards (IFRS) and requires a
company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Once effective, ASU 2014-09 can
be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initial adoption recognized at the date of initial application. In March 2016, the FASB issued ASU 2016-08, Revenue from
Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08). The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent
considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10). The amendments in ASU 2016-10 clarify aspects
relating to the identification of performance obligations and improve the operability and understandability of the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Update 2016-12Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (ASU 2016-12). The amendments in ASU 2016-12 address certain issues identified on assessing collectability, presentation of sales taxes, noncash
consideration, and completed contracts and contract modifications at transition. The effective date for all ASUs noted above is annual and interim reporting periods beginning July 1, 2018. The Company is currently evaluating the impact these ASUs
will have on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles-Goodwill and
Other-Internal-Use Software (Subtopic 350-40): Customers Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05). ASU 2015-05 clarifies guidance about whether a customers cloud computing arrangement
includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud
computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU was adopted on a prospective basis for arrangements entered into, or materially modified beginning July 1,
2016. The adoption did not have a material impact on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The amendments in ASU 2016-01 address certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. ASU 2016-01 is effective for the Company for annual and interim reporting periods beginning July 1, 2018. The Company is currently evaluating the impact ASU 2016-01 will have on its
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02).
The amendments in ASU 2016-02 address certain aspects in lease accounting, with the most significant impact for lessees. The amendments in ASU 2016-02 require lessees to recognize all leases on the balance sheet by recording a right-of-use asset and
a lease liability, and lessor accounting has been updated to align with the new requirements for lessees. The new standard also provides changes to the existing sale-leaseback guidance. ASU 2016-02 is effective for the Company for annual and interim
reporting periods beginning July 1, 2019. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The amendments
in ASU
6
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2016-09 address several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is effective for the Company for annual and interim reporting periods beginning July 1, 2017. The Company is currently evaluating the impact ASU 2016-09 will have on its consolidated
financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (ASU 2016-13). The amendments in ASU 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be
collected. ASU 2016-13 is effective for the Company for annual and interim reporting periods beginning July 1, 2020. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a
consensus of the Emerging Issues Task Force) (ASU 2016-15). The amendments in ASU 2016-15 address eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and
cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU 2016-15 is effective for the Company for annual and interim reporting periods beginning July 1, 2018. The
Company is currently evaluating the impact ASU 2016-15 will have on its consolidated financial statements.
NOTE 2. ACQUISITIONS, DISPOSALS
AND OTHER TRANSACTIONS
Fiscal 2017
Wireless Group plc
In September 2016, the Company completed its acquisition of Wireless
Group plc (Wireless Group) for a purchase price of 315 pence per share in cash, or approximately £220 million (approximately $285 million) in the aggregate, plus $23 million of assumed debt which was repaid subsequent to
closing. Wireless Group operates talkSPORT, the leading sports radio network in the U.K., and a portfolio of radio stations in the U.K. and Ireland. The acquisition broadens the Companys range of services in the U.K., Ireland and
internationally, and the Company expects to closely align Wireless Groups operations with those of
The Sun
and
The Times
. The Company utilized the restricted cash which was specifically set aside at June 30, 2016 for purposes of
funding the acquisition and therefore the Company has no restricted cash as of September 30, 2016.
The total transaction value for the
Wireless Group acquisition is set forth below (in millions):
|
|
|
|
|
Cash paid for Wireless Group equity
|
|
$
|
285
|
|
Plus: Assumed debt
|
|
|
23
|
|
|
|
|
|
|
Total transaction value
|
|
$
|
308
|
|
|
|
|
|
|
Under the purchase method of accounting, the total consideration is allocated to net tangible and intangible assets based
upon the fair value as of the date of completion of the acquisition. The excess of the total consideration over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. The acquired intangible assets of
approximately $193 million primarily relate to broadcast licenses which have an indefinite life. The Company recorded approximately $149 million of goodwill on the transaction. The values assigned to the acquired assets and liabilities are based on
preliminary estimates of fair value available as of the date of this filing and may be adjusted upon completion of final valuations of certain assets and liabilities. Any changes in
7
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
these fair values could potentially result in an adjustment to the goodwill recorded for this transaction. Wireless Groups results are included within the News and Information Services
segment, and it is considered a separate reporting unit for purposes of the Companys annual goodwill impairment review.
Fiscal
2016
Checkout 51 Mobile Apps ULC
In July 2015, the Company acquired Checkout 51 Mobile Apps ULC (Checkout 51) for approximately $13 million in cash at closing and approximately $10 million in deferred cash consideration which
was paid during fiscal 2016. Checkout 51 is a data-driven digital incentives company that provides News America Marketing with a leading receipt recognition mobile app which enables packaged goods companies and brands to reach consumers with highly
personalized marketing campaigns. Checkout 51s results are included within the Companys News and Information Services segment.
Unruly Holdings Limited
On September
30, 2015, the Company acquired Unruly Holdings Limited (Unruly) for approximately £60 million (approximately $90 million) in cash and up to £56 million (approximately $86 million) in future cash consideration related to
payments primarily contingent upon the achievement of certain performance objectives. As a result of the acquisition, the Company recognized a liability of approximately $40 million related to the contingent consideration. The fair value of the
contingent consideration was estimated by applying a probability-weighted income approach. In accordance with Accounting Standards Codification (ASC) 350, IntangiblesGoodwill and Other (ASC 350), $43 million of the
purchase price has been allocated to acquired technology with a weighted-average useful life of 7 years, $21 million has been allocated to customer relationships and tradenames with a weighted-average useful life of 6 years and $68 million has been
allocated to goodwill. Unruly is a leading global video distribution platform that is focused on delivering branded video advertising across websites and mobile devices. Unrulys results of operations are included within the News and
Information Services segment, and it is considered a separate reporting unit for purposes of the Companys annual goodwill impairment review.
DIAKRIT International Limited
In February 2016, the Company acquired a 92% interest in
DIAKRIT International Limited (DIAKRIT) for approximately $40 million in cash. The Company also has the option to purchase, and the minority shareholders have the option to sell to the Company, the remaining 8% in two tranches over
the next six years at fair value. DIAKRIT is a digital visualization solutions company that helps homeowners see the potential in their future living environment with digital visualization solutions that enable them to plan, furnish and decorate
their dream home, while also helping agents and developers generate more buyer inquiries and accelerate their property sale processes. DIAKRITs results are included within the Digital Real Estate Services segment, and it is considered a
separate reporting unit for purposes of the Companys annual goodwill impairment review.
iProperty Group Limited
In February 2016, REA Group Limited (REA Group), in which the Company holds a 61.6% interest, increased its investment in iProperty Group
Limited (iProperty) from 22.7% to approximately 86.9% for A$482 million in cash (approximately $340 million). The remaining 13.1% not currently owned will become mandatorily redeemable during fiscal 2018. As a result, the Company
recognized a liability of approximately $76 million, which reflects the present value of the amount expected to be paid for the remaining interest based on the
8
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
formula specified in the acquisition agreement. The acquisition was funded primarily with the proceeds from borrowings under an unsecured syndicated revolving loan facility (the REA
Facility). (Refer to Note 6Borrowings). The acquisition of iProperty extends REA Groups market leading business in Australia to attractive markets throughout Southeast Asia. iProperty is a subsidiary of REA Group,
and its results are included within the Digital Real Estate Services segment.
In accordance with ASC 805 Business Combinations,
REA Group recognized a gain of $29 million resulting from the revaluation of its previously held equity interest in iProperty in Other, net in the Statement of Operations for the fiscal year ended June 30, 2016. The total fair value of iProperty at
the acquisition date is set forth below (in millions):
|
|
|
|
|
Cash paid for iProperty equity
|
|
$
|
340
|
|
Deferred consideration
|
|
|
76
|
|
|
|
|
|
|
Total consideration
|
|
|
416
|
|
|
|
|
|
|
Fair value of previously held iProperty investment
|
|
|
120
|
|
|
|
|
|
|
Total fair value
|
|
$
|
536
|
|
|
|
|
|
|
Under the purchase method of accounting, the total consideration is allocated to net tangible and intangible assets based
upon the fair value as of the date of completion of the acquisition. The excess of the total consideration over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. The allocation is as follows (in millions):
|
|
|
|
|
Assets Acquired:
|
|
|
|
|
Goodwill
|
|
$
|
498
|
|
Intangible assets
|
|
|
72
|
|
Net Liabilities
|
|
|
(34
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
536
|
|
|
|
|
|
|
The acquired intangible assets primarily relate to tradenames which have an indefinite life.
Flatmates.com.au Pty Ltd
In May 2016,
REA Group acquired Flatmates.com.au Pty Ltd (Flatmates) for $19 million in cash at closing and up to $15 million in future cash consideration related to payments contingent upon the achievement of certain performance objectives.
Flatmates operates the Flatmates.com.au website, which is a market leading share accommodation site in Australia. The acquisition enhances REA Groups Australian product offering by extending its reach into the quickly growing share
accommodation business. Flatmates is a subsidiary of REA Group, and its results since acquisition are included within the Digital Real Estate Services segment.
Australian Regional Media
In June 2016, the Company entered into an agreement to purchase
Australian Regional Media (ARM) from APN News and Media Limited (APN) for approximately $30 million. ARM operates a portfolio of regional print assets and websites and extends the reach of the Australian newspaper business to
new customers in new geographic regions. The acquisition remains subject to regulatory approval.
9
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. DISCONTINUED OPERATIONS
During the first quarter of fiscal 2016, management approved a plan to dispose of the Companys digital education business. As a result of the plan and the discontinuation of further significant
business activities in the Digital Education segment, the assets and liabilities of this segment were classified as held for sale and the results of operations have been classified as discontinued operations for all periods presented in accordance
with ASC 205-20, Discontinued Operations.
In the first quarter of fiscal 2016, the Company recognized a pre-tax non-cash
impairment charge of $76 million reflecting a write down of the digital education business to its fair value less costs to sell. The impairment charge is included within Loss before income tax benefit in the table below. In addition, the Company
recognized a tax benefit of $151 million upon reclassification of the Digital Education segment to discontinued operations.
The following
table summarizes the results of operations from the discontinued segment:
|
|
|
|
|
|
|
|
|
|
|
For the three months
ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
Revenues
|
|
$
|
|
|
|
$
|
26
|
|
Loss before income tax benefit
|
|
|
|
|
|
|
(122
|
)
|
Income tax benefit
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
$
|
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
Net cash used in operating activities
|
|
$
|
(3
|
)
|
|
$
|
(35
|
)
|
Net cash used in investing activities
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(3
|
)
|
|
$
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale related to discontinued operations as of September 30, 2016 and June 30, 2016
are included in Other current liabilities in the Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
June 30,
2016
|
|
|
|
(in millions)
|
|
Current assets
|
|
$
|
|
|
|
$
|
1
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
5
|
|
|
|
7
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
5
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Net liabilities held for sale
|
|
$
|
(5
|
)
|
|
$
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
10
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RESTRUCTURING CHARGES
During the three months ended September 30, 2016 and 2015, the Company recorded restructuring charges of $20 million and $17 million, respectively, of which $19 million and $12 million, respectively,
related to the News and Information Services segment. The restructuring charges recorded in fiscal 2017 and 2016 were for employee termination benefits.
Changes in restructuring program liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
One
time
employee
termination
benefits
|
|
|
Facility
related
costs
|
|
|
Other costs
|
|
|
Total
|
|
|
One
time
employee
termination
benefits
|
|
|
Facility
related
costs
|
|
|
Other costs
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balance, beginning of period
|
|
$
|
33
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
44
|
|
|
$
|
47
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
58
|
|
Additions
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Payments
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
Other
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
30
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
41
|
|
|
$
|
34
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016, restructuring liabilities of approximately $31 million were included in the Balance Sheet in
Other current liabilities and $10 million were included in Other non-current liabilities.
NOTE 5. INVESTMENTS
The Companys investments were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership
Percentage as of
September 30,
2016
|
|
|
As of
September 30,
2016
|
|
|
As of
June 30,
2016
|
|
|
|
|
|
|
(in millions)
|
|
Equity method investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foxtel
(a)
|
|
|
50%
|
|
|
$
|
1,461
|
|
|
$
|
1,437
|
|
Other equity method investments
|
|
|
various
|
|
|
|
106
|
|
|
|
101
|
|
Loan receivable from Foxtel
(b)
|
|
|
N/A
|
|
|
|
346
|
|
|
|
338
|
|
Available-for-sale securities
(c)
|
|
|
various
|
|
|
|
139
|
|
|
|
189
|
|
Cost method investments
(d)
|
|
|
various
|
|
|
|
217
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
$
|
2,269
|
|
|
$
|
2,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The change in the
Foxtel investment for the three months ended September 30, 2016 was primarily due to the impact of foreign currency fluctuations.
|
(b)
|
In May 2012,
Foxtel purchased Austar United Communications Ltd. The transaction was funded by Foxtel bank debt and pro rata capital contributions made by Foxtel shareholders in the form of subordinated shareholder notes based on their respective ownership
interests. The Companys share of the subordinated shareholder notes was approximately A$451 million ($346 million and $338 million as of September 30, 2016 and June 30, 2016, respectively). The subordinated shareholder notes can be repaid
beginning in July 2022 provided that Foxtels senior debt has been repaid. The subordinated shareholder notes have a maturity
|
11
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
date of July 15, 2027, with interest payable on June 30 each year and at maturity. On June 22, 2016, Foxtel and Foxtels shareholders agreed to modify the terms of the loan
receivable to reduce the interest rate from 12% to 10.5%, to more closely align with current market rates. Upon maturity, the principal advanced will be repayable.
|
(c)
|
Available-for-sale
securities primarily include the Companys investments in APN and The Rubicon Project, Inc. During fiscal 2016, the Company participated in an entitlement offer to maintain its 14.99% interest in APN for $20 million. APN operates a portfolio of
Australian radio and outdoor media assets.
|
(d)
|
Cost method
investments primarily include the Companys investment in SEEKAsia Limited and certain investments in China.
|
The
Company measures the fair market values of available-for-sale investments as Level 1 financial instruments under ASC 820, Fair Value Measurement, as such investments have quoted prices in active markets. The cost basis, unrealized gains,
unrealized losses and fair market value of available-for-sale investments are set forth below:
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
June 30,
2016
|
|
|
|
(in millions)
|
|
Cost basis of available-for-sale investments
|
|
$
|
144
|
|
|
$
|
155
|
|
Accumulated gross unrealized gain
|
|
|
5
|
|
|
|
34
|
|
Accumulated gross unrealized loss
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of available-for-sale investments
|
|
$
|
139
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (asset) liability
|
|
$
|
(1
|
)
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
Equity (Losses) Earnings of Affiliates
The Companys share of the (losses) earnings of its equity affiliates was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
Foxtel
(a)
|
|
$
|
(11
|
)
|
|
$
|
9
|
|
Other equity affiliates
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total Equity (losses) earnings of affiliates
|
|
$
|
(15
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In accordance with
ASC 350, the Company amortized $19 million and $12 million, respectively, related to excess cost over the Companys proportionate share of its investments underlying net assets allocated to finite-lived intangible assets during the three
months ended September 30, 2016 and 2015. Such amortization is reflected in Equity (losses) earnings of affiliates in the Statements of Operations. The increase in amortization expense recognized by the Company in the current year period was offset
by a corresponding decrease in amortization expense recognized by Foxtel as certain intangible assets were fully amortized in fiscal 2016.
|
12
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for Foxtel, presented in accordance with U.S. GAAP, was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
Revenues
|
|
$
|
618
|
|
|
$
|
587
|
|
Operating income
(a)
|
|
|
91
|
|
|
|
85
|
|
Net income
|
|
|
16
|
|
|
|
42
|
|
(a)
|
Includes
Depreciation and amortization of $52 million and $55 million for the three months ended September 30, 2016 and 2015, respectively. Operating income before depreciation and amortization was $143 million and $140 million for the three months ended
September 30, 2016 and 2015, respectively.
|
For the three months ended September 30, 2016, Foxtels revenues increased
$31 million, or 5%, primarily as a result of the positive impact of foreign currency fluctuations as revenues increased modestly in local currency. Operating income increased primarily due to higher revenues as noted above, lower depreciation and
amortization expense and the positive impact of foreign currency fluctuations, partially offset by higher programming spend. Net income decreased mainly due to the $21 million loss resulting from Foxtel managements decision to cease Presto
operations in January 2017.
NOTE 6. BORROWINGS
The Companys total borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
June 30,
2016
|
|
|
|
(in millions)
|
|
Facility due December 2017
|
|
$
|
92
|
|
|
$
|
90
|
|
Facility due December 2018
|
|
|
92
|
|
|
|
90
|
|
Facility due December 2019
|
|
|
183
|
|
|
|
179
|
|
Other obligations
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
381
|
|
|
|
372
|
|
Less: Current portion
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
377
|
|
|
$
|
369
|
|
|
|
|
|
|
|
|
|
|
REA Group Unsecured Revolving Loan Facility
REA Group entered into a A$480 million unsecured syndicated revolving loan facility agreement in connection with the acquisition of iProperty. The REA Facility consists of three sub facilities of A$120
million, A$120 million and A$240 million which become due in December 2017, December 2018 and December 2019, respectively. In February 2016, REA Group drew down the full A$480 million (approximately $340 million as of such date) available under the
REA Facility, and the proceeds, less lenders fees of $1 million, were used to fund the iProperty acquisition. Borrowings under the REA Facility bear interest at a floating rate of the Australian BBSY plus a margin in the range of 0.85% and
1.45% depending on REA Groups net leverage ratio. As of September 30, 2016, REA Group was paying a margin of between 0.90% and 1.10%. REA Group paid approximately $3 million in interest for the three months ended September 30, 2016 at a
weighted average interest rate of 2.9%. The REA Facility requires REA Group to maintain a net leverage ratio of not more than
13
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3.25 to 1.0 and an interest coverage ratio of not less than 3.0 to 1.0. As of September 30, 2016, REA Group was in compliance with all of the applicable debt covenants.
Revolving Credit Facility
The
Companys Credit Agreement (as amended, the Credit Agreement) provides for an unsecured $650 million revolving credit facility (the Facility) that can be used 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 Facility up to a maximum amount of $900 million.
In October 2015, the Company entered into an amendment to the Credit Agreement (the Amendment) which, among other things, extended the
original term of the Facility by two years and lowered the commitment fee payable by the Company. As a result of the Amendment, the lenders commitments now terminate on October 23, 2020, and any borrowings will be due at that time.
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.
The Credit Agreement contains customary affirmative and negative covenants and events of default, with customary exceptions, including limitations on the ability of the Company and its 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. 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 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 September 30, 2016, the Company was in compliance with all of the applicable debt covenants.
Interest on borrowings under the Facility is based on either (a) a Eurodollar Rate formula or (b) the Base Rate formula, each as set forth in
the Credit Agreement. The applicable margin and the commitment fee are based on the pricing grid in the Credit Agreement, which varies based on the Companys adjusted operating income leverage ratio. As of September 30, 2016, the Company was
paying a commitment fee of 0.225% on any undrawn balance and an applicable margin of 0.50% for a Base Rate borrowing and 1.50% for a Eurodollar Rate borrowing.
As of the date of this filing, the Company has not borrowed any funds under the Facility.
14
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. EQUITY
The following table summarizes changes in equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
News
Corporation
stockholders
|
|
|
Noncontrolling
Interests
|
|
|
Total
Equity
|
|
|
News
Corporation
stockholders
|
|
|
Noncontrolling
Interests
|
|
|
Total
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balance, beginning of period
|
|
$
|
11,564
|
|
|
$
|
218
|
|
|
$
|
11,782
|
|
|
$
|
11,945
|
|
|
$
|
171
|
|
|
$
|
12,116
|
|
Net (loss) income
|
|
|
(15
|
)
|
|
|
15
|
|
|
|
|
|
|
|
175
|
|
|
|
14
|
|
|
|
189
|
|
Other comprehensive income (loss)
|
|
|
41
|
|
|
|
2
|
|
|
|
43
|
|
|
|
(443
|
)
|
|
|
(7
|
)
|
|
|
(450
|
)
|
Dividends
|
|
|
(59
|
)
|
|
|
(18
|
)
|
|
|
(77
|
)
|
|
|
(58
|
)
|
|
|
(15
|
)
|
|
|
(73
|
)
|
Stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
(13
|
)
|
Other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
10
|
|
|
|
2
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
11,530
|
|
|
$
|
216
|
|
|
$
|
11,746
|
|
|
$
|
11,616
|
|
|
$
|
165
|
|
|
$
|
11,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchases
In May 2013, the Companys Board of Directors (the Board of Directors) authorized the Company to repurchase up to an aggregate of $500 million of its Class A Common Stock. On
May 10, 2015, the Company announced it had begun repurchasing shares of Class A Common Stock under the stock repurchase program. No stock repurchases were made during the three months ended September 30, 2016. Through October 31,
2016, the Company repurchased approximately 5.2 million shares of Class A Common Stock for an aggregate cost of approximately $71 million. The remaining authorized amount under the stock repurchase program as of October 31, 2016 was
approximately $429 million. All decisions regarding any future stock repurchases are at the sole discretion of a duly appointed committee of the Board of Directors and management. The committees decisions regarding future stock
repurchases will be evaluated from time to time in light of many factors, including the Companys financial condition, earnings, capital requirements and debt facility covenants, other contractual restrictions, as well as legal requirements,
regulatory constraints, industry practice, market volatility 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 Board of Directors and
the Board of Directors cannot provide any assurances that any additional shares will be repurchased.
Dividends
In August 2016, the Board of Directors declared a semi-annual cash dividend of $0.10 per share for Class A Common Stock and Class B Common Stock. This
dividend was paid on October 19, 2016 to stockholders of record at the close of business on September 14, 2016. The following table summarizes the dividends declared per share on both the Companys Class A Common Stock and the Class B
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash dividend per share
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
The timing, declaration, amount and payment of future dividends to stockholders, if any, is within the discretion of the
Board of Directors. The Board of Directors decisions regarding the payment of future dividends will
15
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
depend on many factors, including the Companys financial condition, earnings, capital requirements and debt facility covenants, other contractual restrictions, as well as legal
requirements, regulatory constraints, industry practice, market volatility and other factors that the Board of Directors deems relevant.
NOTE 8. EQUITY BASED COMPENSATION
Employees of the Company participate in the News Corporation 2013 Long-Term Incentive Plan (the 2013 LTIP) under which equity-based
compensation, including stock options, performance stock units (PSUs), restricted stock awards, restricted stock units (RSUs) and other types of awards can be granted. The Company has the ability to award up to 30 million
shares of Class A Common Stock under the terms of the 2013 LTIP. Additionally, in connection with the acquisition of Move, the Company assumed Moves equity incentive plans and substantially all of the awards outstanding under such
plans.
The Company recognized $20 million and $17 million of equity-based compensation expense for the three months ended September 30, 2016
and 2015, respectively.
Performance Stock Units
During the three months ended September 30, 2016 and 2015, the Company granted approximately 5.2 million and 3.7 million PSUs, respectively, at target, of which approximately 3.8 million and 2.6 million,
respectively, will be settled in Class A Common Stock assuming performance conditions are met, with the remaining, having been granted to executive directors and to employees in certain foreign locations, being settled in cash assuming performance
conditions are met. Cash settled awards are marked-to-market each reporting period.
During the three months ended September 30, 2016 and
2015, approximately 2.8 million and 1.2 million PSUs, respectively, vested, of which approximately 1.8 million and 1.0 million, respectively, were settled in shares of Class A Common Stock before statutory tax withholdings. The remaining 1.0
million and 0.2 million PSUs, respectively, settled during the three months ended September 30, 2016 and 2015 were settled in cash for approximately $13.1 million and $3.3 million, respectively, before statutory tax withholdings.
Restricted Stock Units
During the three
months ended September 30, 2016 and 2015, the Company granted nil and approximately 0.2 million RSUs, respectively, all of which will be settled in Class A Common Stock.
During the three months ended September 30, 2016 and 2015, approximately 0.1 million and 0.1 million RSUs, respectively, vested, all of which were settled in shares of Class A Common Stock.
16
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings per share under ASC 260, Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions, except per share amounts)
|
|
Income from continuing operations
|
|
$
|
|
|
|
$
|
143
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(15
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to News Corporation stockholders
|
|
|
(15
|
)
|
|
|
129
|
|
Income from discontinued operations, net of tax, available to News Corporation stockholders
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) income available to News Corporation stockholders
|
|
$
|
(15
|
)
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstandingbasic
|
|
|
580.8
|
|
|
|
581.0
|
|
Dilutive effect of equity awards
(a)
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstandingdiluted
|
|
|
580.8
|
|
|
|
582.7
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to News Corporation stockholders per sharebasic and
diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.22
|
|
Income from discontinued operations available to News Corporation stockholders per sharebasic and diluted
|
|
$
|
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to News Corporation stockholders per sharebasic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The dilutive impact of the Companys PSUs, RSUs and stock options have been excluded from the calculation of diluted (loss) earnings per share for
the three months ended September 30, 2016 because their inclusion would have an antidilutive effect on the net loss per share.
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
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 Companys commitments as of September 30, 2016 have not changed significantly from the disclosures included in the 2016 Form 10-K.
Contingencies
The
Company routinely is involved in various legal proceedings, claims and governmental inspections or investigations, including those discussed below. The outcome of these matters and claims is subject to significant uncertainty, and the Company often
cannot predict what the eventual outcome of pending matters will be or the timing of the ultimate resolution of these matters. Fees, expenses, fines, penalties, judgments or settlement costs which might be incurred by the Company in connection with
the various proceedings could adversely affect its results of operations and financial condition.
17
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company establishes an accrued liability for legal claims when it determines that a loss is both
probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for
which an accrual has been established may be higher or lower than the amounts accrued for such matters. Legal fees associated with litigation and similar proceedings are expensed as incurred. Except as otherwise provided below, for the contingencies
disclosed for which there is at least a reasonable possibility that a loss may be incurred, the Company was unable to estimate the amount of loss or range of loss. The Company recognizes gain contingencies when the gain becomes realized or
realizable.
News America Marketing
In-Store Marketing and FSI Purchasers
On February 29, 2016, the parties agreed to settle
the litigation in the U.S. District Court for the Southern District of New York in which The Dial Corporation, Henkel Consumer Goods, Inc., H.J. Heinz Company, H.J. Heinz Company, L.P., Foster Poultry Farms, Smithfield Foods, Inc., HP Hood LLC and
BEF Foods, Inc. alleged various claims under federal and state antitrust law against News Corporation, News America Incorporated (NAI), News America Marketing FSI L.L.C. (NAM FSI) and News America Marketing In-Store
Services L.L.C. (NAM In-Store Services and, together with News Corporation, NAI and NAM FSI, the NAM Group). Under the terms of the settlement, the NAM Group agreed, among other things, to pay the plaintiffs and their
attorneys approximately $250 million, and the parties agreed to dismiss the litigation with prejudice. As required under the settlement agreement, the NAM Group delivered the proposed settlement amount into escrow during the three months ended
September 30, 2016, to be held pending District Court approval. On October 31, 2016, the District Court approved the settlement, and the settlement payment will be released to the plaintiffs and their attorneys. The NAM Group also settled related
claims for approximately $30 million in February 2016.
Valassis Communications, Inc.
On November 8, 2013, Valassis Communications, Inc. (Valassis) initiated legal proceedings against certain of the Companys
subsidiaries alleging violations of various antitrust laws. These proceedings are described in further detail below.
|
|
|
Valassis previously initiated an action against NAI, NAM FSI and NAM In-Store Services (collectively, the NAM Parties), captioned Valassis
Communications, Inc. v. News America Incorporated, et al., No. 2:06-cv-10240 (E.D. Mich.) (Valassis I), alleging violations of federal antitrust laws, which was settled in February 2010. On November 8, 2013, Valassis filed a
motion for expedited discovery in the previously settled case based on its belief that defendants had engaged in activities prohibited under an order issued by the U.S. District Court for the Eastern District of Michigan in connection with the
parties settlement, which motion was granted by the magistrate judge.
|
Valassis subsequently filed a
Notice of Violation of the order issued by the District Court in Valassis I. The Notice contained allegations that were substantially similar to the allegations Valassis made in Valassis II, described below, and sought treble damages, injunctive
relief and attorneys fees. The Notice also re-asserted claims of unlawful bundling and tying which the magistrate judge had previously recommended be dismissed from Valassis II on the grounds that such claims could only be brought before a
panel of antitrust experts previously appointed in Valassis I (the Antitrust Expert Panel). On March 2, 2015, the NAM Parties filed a motion to refer the Notice to the Antitrust Expert Panel or, in the alternative, strike the
Notice. The District Court granted the NAM Parties motion in part on March
18
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
30, 2016 and ordered that the Notice be referred to the Antitrust Expert Panel. The District Court further ordered that the case be administratively closed and that it may be re-opened following
proceedings before the Antitrust Expert Panel.
|
|
|
On November 8, 2013, Valassis also filed a new complaint in the U.S. District Court for the Eastern District of Michigan against the NAM Group
alleging violations of federal and state antitrust laws and common law business torts (Valassis II). The complaint sought treble damages, injunctive relief and attorneys fees and costs. On December 19, 2013, the NAM Group
filed a motion to dismiss the newly filed complaint.
|
The District Court referred the NAM Groups motion
to dismiss to the magistrate judge for determination, and on July 16, 2014, the magistrate judge recommended that the District Court grant the NAM Groups motion in part with respect to certain claims regarding alleged bundling and tying
conduct and stay the remainder of the action. On March 30, 2016, the District Court adopted in part the magistrate judges recommendation. The District Court ordered that Valassiss bundling and tying claims be dismissed without prejudice
to Valassiss rights to pursue relief for those claims in Valassis I. The District Court sustained Valassiss objection to the stay of Valassis II, but further ordered that all remaining claims in the NAM Groups motion to dismiss be
referred to the Antitrust Expert Panel. The District Court further ordered that the case be administratively closed and that it may be re-opened following proceedings before the Antitrust Expert Panel.
The Antitrust Expert Panel was convened and, on September 24, 2016, issued a Report and Recommendation recommending that the NAM Groups motion to
dismiss the Valassis II complaint be denied. The Antitrust Expert Panel also scheduled a preliminary hearing in Valassis I for December 19, 2016 and ordered discovery to be completed by November 2017. While it is not possible at this time to predict
with any degree of certainty the ultimate outcome of these actions, the NAM Group believes it has been compliant with applicable laws and intends to defend itself vigorously in both actions.
U.K. Newspaper Matters and Related Investigations and Litigation
A purported class action
lawsuit captioned Wilder v. News Corp., et al. was previously filed against 21st Century Fox, Rupert Murdoch, James Murdoch, Rebekah Brooks, Les Hinton and the Companys subsidiary, NI Group Limited (now known as News Corp UK & Ireland
Limited) in the U.S. District Court for the Southern District of New York on behalf of all purchasers of 21st Century Foxs common stock between July 8, 2009 and July 18, 2011 for claims under Section 10(b) and Section 20(a)
of the Securities Exchange Act of 1934, as amended, alleging that false and misleading statements were issued regarding alleged acts of voicemail interception at
The News of the World
and seeking compensatory damages, rescission for damages
sustained and costs. On September 30, 2015, the District Court dismissed all of plaintiffs claims and on September 21, 2016, the District Court denied plaintiffs motion for reconsideration. On October 21, 2016, plaintiffs time to
appeal the District Courts decision expired, and the case was closed.
In addition, civil claims have been brought against the Company
with respect to, among other things, voicemail interception and inappropriate payments to public officials at the Companys former publication,
The News of the World
, and at
The Sun
, and related matters (the U.K. Newspaper
Matters). The Company has admitted liability in many civil cases and has settled a number of cases. The Company also settled a number of claims through a private compensation scheme which was closed to new claims after April 8, 2013.
In connection with the Companys separation of its businesses (the Separation) from 21st Century Fox on June 28, 2013 (the
Distribution Date), the Company and 21st Century Fox agreed in the Separation and Distribution Agreement that 21st Century Fox would indemnify the Company for payments made after the Distribution Date
19
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 previously concluded 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.
21st Century Foxs indemnification obligations with respect to these matters will be settled on an after-tax basis.
The net expense
related to the U.K. Newspaper Matters in Selling, general and administrative expenses was $2 million and $5 million for the three months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, the Company has provided for its best
estimate of the liability for the claims that have been filed and costs incurred, including liabilities associated with employment taxes, and has accrued approximately $101 million, of which approximately $58 million will be indemnified by 21st
Century Fox, and a corresponding receivable was recorded in Other current assets on the Balance Sheet as of September 30, 2016. It is not 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. It is possible that these proceedings and any adverse resolution
thereof could damage its reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.
Other
The Companys 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 Companys domestic subsidiaries 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. In conjunction with the Separation, the Company entered into the Tax Sharing and Indemnification Agreement with 21st Century Fox, which 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.
20
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company provides pension, postretirement health care, defined contribution and medical benefits primarily in the U.S., U.K. and Australia to the
Companys eligible employees and retirees. The Company funds amounts, at a minimum, in accordance with statutory requirements for all plans. Plan assets consist principally of common stocks, marketable bonds and government securities.
The amortization of amounts related to unrecognized prior service (credits) and deferred losses were reclassified out of other comprehensive
income as a component of net periodic benefit costs. The components of net periodic benefits costs were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
Postretirement
benefits
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
|
For the three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
Service cost benefits earned during the period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
Interest costs on projected benefit obligations
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
11
|
|
|
|
1
|
|
|
|
1
|
|
Expected return on plan assets
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(14
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred losses
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Amortization of prior service (credits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Settlements, curtailments and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2016 and 2015, the Company contributed approximately $12 million and $11
million, respectively, to its various pension and postretirement plans.
NOTE 12. INCOME TAXES
At the end of each interim period, the Company estimates the annual effective income tax rate and applies that rate to its ordinary quarterly earnings.
The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect and are individually computed are recognized in the interim period in which those items
occur. In addition, the effects of changes in enacted tax laws or rates or tax status are recognized in the interim period in which the change occurs.
The Companys effective income tax rate for the three months ended September 30, 2016 was higher than the U.S. statutory tax rate, primarily due to non-taxable book gains, which had a greater
impact on the Companys effective tax rate for the quarter due to the Companys low pre-tax book loss.
The Companys effective
income tax rate for the three months ended September 30, 2015 was lower than the U.S. statutory tax rate primarily due to a tax benefit of approximately $106 million related to the release of previously established valuation
allowances related to certain U.S. federal net operating losses and state deferred tax assets. This benefit was recognized in conjunction with managements plan to dispose of the Companys digital education business as
the Company expects to generate sufficient U.S. taxable income to utilize these deferred tax assets prior to expiration. In addition, the Company recognized a tax benefit of approximately $151 million upon reclassification of the Digital
Education segment to discontinued operations in Income from discontinued operations, net of tax, in the Statement of Operations for the three months ended September 30, 2015.
21
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Companys tax returns are subject to on-going review and examination by various tax
authorities. Tax authorities may not agree with the treatment of items reported in the Companys tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable. The Company believes it has appropriately accrued for
the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid, however, these liabilities may need to be adjusted as new information becomes known and as tax
examinations continue to progress.
The Company paid gross income taxes of $34 million and $19 million during the three months ended
September 30, 2016 and 2015, respectively, and received income tax refunds of nil and $1 million, respectively.
NOTE 13. SEGMENT
INFORMATION
The Company manages and reports its businesses in the following five segments:
|
|
|
News and Information Services
The News and Information Services segment includes the Companys global print, digital and
broadcast radio media platforms. These product offerings include the global print and digital versions of
The Wall Street Journal
and the Dow Jones Media Group, which includes
Barrons
and MarketWatch, as well as the
Companys suite of professional information products, including Factiva, Dow Jones Risk & Compliance, Dow Jones Newswires, Dow Jones PEVC and DJX. 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 News America Marketing, a leading provider of home-delivered shopper media, in-store marketing products and services and digital marketing solutions, including Checkout 51s mobile
application, as well as Unruly, a leading global video advertising distribution platform, and Wireless Group, operator of talkSPORT, the leading sports radio network in the U.K.
|
|
|
|
Book Publishing
The Book Publishing segment consists of HarperCollins, the second largest consumer book publisher in the world, with
operations in 18 countries and particular strengths in general fiction, nonfiction, childrens and religious publishing. HarperCollins owns more than 120 branded publishing imprints, including Avon, Harper, HarperCollins Childrens Books,
William Morrow, Harlequin and Christian publishers Zondervan and Thomas Nelson, and publishes works by well-known authors such as Harper Lee, Patricia Cornwell, Veronica Roth, Rick Warren, Sarah Young and Agatha Christie and popular titles such
as
The Hobbit
,
Goodnight Moon
,
To Kill a Mockingbird, Jesus Calling
and the
Divergent
series.
|
|
|
|
Digital Real Estate Services
The Digital Real Estate Services segment consists primarily of the Companys interests in REA
Group and Move. REA Group is a publicly traded company listed on the Australian Securities Exchange (ASX: REA) that advertises property and property-related services on websites and mobile applications across Australia, Asia and Europe. REA Group
operates Australias leading residential and commercial property websites, realestate.com.au and realcommercial.com.au. The Company holds a 61.6% interest in REA Group.
|
Move is a leading provider of online real estate services in the U.S. and primarily operates realtor.com
®
, a premier real estate information and services marketplace. Move also offers a number of professional software and
services products, including Top Producer
®
, TigerLead
®
and ListHub
TM
. The Company owns an 80% interest in Move, with the remaining 20% being held by REA Group.
|
|
|
Cable Network Programming
The Cable Network Programming segment consists of FOX SPORTS Australia, the leading sports programming
provider in Australia, with seven high definition television
|
22
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
channels distributed via cable, satellite and IP, several interactive viewing applications and broadcast rights to live sporting events in Australia including: National Rugby League, the domestic
football league, international cricket, Australian Rugby Union and various motorsports programming.
|
|
|
|
Other
The Other segment consists primarily of general corporate overhead expenses, the corporate Strategy and Creative Group and
costs related to the U.K. Newspaper Matters. The Companys 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, investments and dispositions.
|
Segment EBITDA is defined as revenues less operating expenses, and selling,
general and administrative expenses. Segment EBITDA does not include: Depreciation and amortization, restructuring charges, equity (losses) earnings of affiliates, interest, net, other, net, income tax benefit and net income attributable to
noncontrolling interests. Segment EBITDA may not be comparable to similarly titled measures reported by other companies, since companies and investors may differ as to what items should be included in the calculation of Segment EBITDA.
Segment EBITDA is the primary measure used by the Companys chief operating decision maker to evaluate the performance of and allocate
resources within the Companys businesses. Segment EBITDA provides management, investors and equity analysts with a measure to analyze the operating performance of each of the Companys 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).
23
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Total Segment EBITDA is a non-GAAP measure and should be considered in addition to, not as a substitute
for, net (loss) 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 Companys financial performance. The Company believes that information about Total Segment EBITDA allows users of its Consolidated Financial Statements
to evaluate changes in the operating results of the Company separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results. The following table reconciles
Total Segment EBITDA to income from continuing operations.
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
News and Information Services
|
|
$
|
1,222
|
|
|
$
|
1,290
|
|
Book Publishing
|
|
|
389
|
|
|
|
409
|
|
Digital Real Estate Services
|
|
|
226
|
|
|
|
191
|
|
Cable Network Programming
|
|
|
128
|
|
|
|
124
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,965
|
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA:
|
|
|
|
|
|
|
|
|
News and Information Services
|
|
$
|
46
|
|
|
$
|
83
|
|
Book Publishing
|
|
|
48
|
|
|
|
42
|
|
Digital Real Estate Services
|
|
|
67
|
|
|
|
57
|
|
Cable Network Programming
|
|
|
14
|
|
|
|
28
|
|
Other
|
|
|
(45
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
Total Segment EBITDA
|
|
|
130
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(120
|
)
|
|
|
(121
|
)
|
Restructuring charges
|
|
|
(20
|
)
|
|
|
(17
|
)
|
Equity (losses) earnings of affiliates
|
|
|
(15
|
)
|
|
|
8
|
|
Interest, net
|
|
|
7
|
|
|
|
12
|
|
Other, net
|
|
|
17
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax benefit
|
|
|
(1
|
)
|
|
|
52
|
|
Income tax benefit
|
|
|
1
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
June 30,
2016
|
|
|
|
(in millions)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
News and Information Services
|
|
$
|
6,931
|
|
|
$
|
6,728
|
|
Book Publishing
|
|
|
1,877
|
|
|
|
1,855
|
|
Digital Real Estate Services
|
|
|
2,152
|
|
|
|
2,158
|
|
Cable Network Programming
|
|
|
1,117
|
|
|
|
1,101
|
|
Other
(a)
|
|
|
923
|
|
|
|
1,371
|
|
Investments
|
|
|
2,269
|
|
|
|
2,270
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,269
|
|
|
$
|
15,483
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The Other segment
primarily includes Cash and cash equivalents.
|
24
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2016
|
|
|
As of
June 30,
2016
|
|
|
|
(in millions)
|
|
Goodwill and intangible assets, net:
|
|
|
|
|
|
|
|
|
News and Information Services
|
|
$
|
2,987
|
|
|
$
|
2,651
|
|
Book Publishing
|
|
|
853
|
|
|
|
869
|
|
Digital Real Estate Services
|
|
|
1,513
|
|
|
|
1,499
|
|
Cable Network Programming
|
|
|
913
|
|
|
|
898
|
|
Other
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangible assets, net
|
|
$
|
6,270
|
|
|
$
|
5,921
|
|
|
|
|
|
|
|
|
|
|