SECURITIES AND EXCHANGE COMMISSION
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number
001-35769
(Exact name of registrant as specified in its charter)
| | | |
| | |
(State or other jurisdiction of incorporation or organization) | | |
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1211 Avenue of the Americas, New York, New York | | |
(Address of principal executive offices) | | |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Class A Common Stock, par value $0.01 per share | | | | The Nasdaq Global Select Market |
Class B Common Stock, par value $0.01 per share | | | | The Nasdaq Global Select Market |
Class A Preferred Stock Purchase Rights | | | | The Nasdaq Global Select Market |
Class B Preferred Stock Purchase Rights | | | | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
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| | | | Smaller reporting company | | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes
☐
No
☒
As of November 1, 2019, 388,557,267 shares of Class A Common Stock and 199,630,240 shares of Class B Common Stock were outstanding
.
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, subscription video services in Australia, book publishing and digital real estate services.
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, 2020. The preparation of the Company’s 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 measured at fair value, if the fair value is readily determinable. If an investment’s fair value is not readily determinable, the Company will measure the investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
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 Company’s Annual Report on Form
10-K
for the fiscal year ended June 30, 2019 as filed with the Securities and Exchange Commission (the “SEC”) on August 13, 2019 (the “2019 Form
10-K”).
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current year presentation. Specifically, in the first quarter of fiscal 2020, the Company reclassified the costs associated with certain initiatives previously included in the Other segment to the News and Information Services segment as these initiatives directly benefit th
is
segment. These reclassifications increased Selling, general and administrative by $7 million for the News and Information Services segment for the three months ended September 30, 2018
.
The Company’s fiscal year ends on the Sunday closest to June 30. Fiscal 2020 and fiscal 2019 include 52 weeks. All references to the three months ended September 30, 2019 and 2018 relate to the three months ended September 29, 2019 and September 30, 2018, respectively. For convenience purposes, the Company continues to date its Consolidated Financial Statements as of September 30.
Recently Issued Accounting Pronouncements
In February 2016, the
Financial Accounting Standards Board (“
FASB
”)
issued
Accounting Standards Update (“ASU”)
2016-02,
“Leases (Topic 842)” (“ASU
2016-02”).
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 FASB also issued additional standards
which provide clarification and implementation guidance,
and
have the same effective date as ASU
2016-02.
The Company adopted ASU
2016-02
on a
modified retrospective basis as of July 1, 2019. As a result of the adoption, the Company recorded
operating lease
assets
lease liabilities for its operating leases of approximately $1.4
b
illion
,
$0.2
b
illion
on July 1,
2019. The Company
also
recorded a $9 million
related to previous sale leaseback
transactions
, which decreased the A
ccum
ulated def
icit balance as
of
July 1, 2019.
The Company’s adoption of ASU
2016-02
also resulted in the reclassification of prepaid and deferred rent to
. See Note
6
—Leases.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In August 2017, the FASB issued ASU
2017-12,
“Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU
2017-12”).
The amendments in ASU
2017-12
more closely align the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments address specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. ASU
2017-12
is effective for the Company for annual and interim reporting periods beginning July 1, 2019. The Company adopted the guidance on a cumulative-effect basis
for its outstanding cash flow hedges that qualified for hedge accounting as of July 1, 2019. The adoption did not have a material impact on the Company’s Consolidated Financial Statements.
In February 2018, the FASB issued ASU
2018-02,
“Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU
2018-02”).
The amendments in ASU
2018-02
provide a reclassification from Accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax
Cuts and Jobs Act (the “Tax Act”)
. ASU
2018-02
is effective for the Company for annual and interim reporting periods beginning July 1, 2019.
The Company adopted the guidance as of July 1, 2019 and elected to not reclassify the stranded tax effects resulting from the Tax Act from Accumulated other comprehensive loss to Accumulated deficit.
The adoption did not have a material impact on the Company’s
Consolidated Financial Statements
.
In April 2019, the FASB issued ASU
2019-04,
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU
2019-04”).
The amendments in ASU
2019-04
clarify certain aspects of accounting for credit losses, hedging activities and financial instruments. For entities that have not yet adopted ASU
2017-12,
the effective date and transition requirements for ASU
2019-04
are the same as the effective date and transition requirements for ASU
2017-12.
For entities that have adopted ASU
2016-01,
“Financial Instruments—Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU
2016-01”),
ASU
2019-04
is effective for the Company for annual and interim reporting periods beginning July 1, 2020 and early adoption is permitted. For clarifications around credit losses, the effective date will be the same as the effective date in ASU
2016-13.
The Company adopted the amendments in ASU
2019-04
related to ASU
2017-12
and ASU
2016-01
as of July 1, 2019. The adoption did not have a material impact on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU
2016-13,
“Financial Instruments—Credit 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
must be adop
ted on a m
odified
-retr
ospective approach and
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
F
inancial
S
tatements.
In August 2018, the FASB issued ASU
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU
2018-13”).
ASU
2018-13
removes, modifies and adds certain disclosure requirements in Topic 820, “Fair Value Measurement.” ASU
2018-13
eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements.
The amendments in ASU 2018-13 related to disclosure requirements must be applied prospectively and all other amendments must be applied retrospectively.
ASU
2018-13
is effective for the Company for annual and interim reporting periods beginning July 1, 2020. The Company is currently evaluating the impact ASU
2018-13
will have on its Consolidated
F
inancial
S
tatements.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On July 1, 2019, the Company adopted ASU
2016-02
on a modified retrospective basis
and
recognized a
$9
million
cumulative-effect adjustment to the opening balance of Accumulated deficit
related to previous sale leaseback transactions
. ASU
2016-02
requires lessees to recognize all operating leases on the balance sheet by recording a lease liability and a
right-of-use
asset. The lease liability represents the present value of the Company’s lease obligations over the lease term. The discount rate used was calculated using the Company’s incremental borrowing rate (“IBR”) which represents the interest rate at which the Company would be expected to borrow an amount equal to the lease payments on a secured basis over a similar term. To derive the IBR, the Company utilizes unsecured borrowing rates and adjusts those rates using the notching method to approximate a collateralized rate. Further adjustments are made to reflect the primary geographies in which the Company operates. The
right-of-use
asset represents the Company’s right to use, or control the use of, the underlying asset for the lease term at lease commencement. The Company recorded operating lease
right-of-use
assets, current operating lease liabilities and noncurrent operating lease liabilities for its operating leases of approximately
$1.4
b
illion
and $1.4
b
illion, respectively, on July 1, 2019.
The Company assesses whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease that is accounted for separately, the classification and initial measurement of the
right-of-use
asset and lease liability is determined at lease commencement, which is the date the underlying asset becomes available for use. The Company recognized the current and noncurrent portion of its lease liabilities within Other current liabilities and
ease liabilities, respectively, and its
right-of-use
assets within
Operating lease
right-of-use
assets in its Balance Sheet.
Rent expense is recognized for operating leases on a straight-line basis over the lease term. Such amounts are presented within either Selling, general and administrative or Operating expenses
based on the nature of the lease. Variable
lease
payments are expensed in the period incurred. The Company’s variable lease payments consist of payments dependent on various external indicators, including common area maintenance, real estate taxes and utility charges.
The Company
the package of practical expedients permitted under ASU
2016-02
transition guidance. Accordingly, the Company did not reassess: (1) whether an expired or existing contract is a lease or contains an embedded lease; (2) lease classification of an expired or existing lease; (3) capitalization of initial direct costs for an expired or existing lease
; (4) existing land easem
ents for lease accounting
.
In addition, the Company elected the short term lease exemption
to not record
leases
a term of 12 months or less
and
do not contain purchase options reasonably certain of being exercised. The Company recognizes rent expense related to these leases on a straight-line basis over the lease term.
In circumstances where the Company is the lessee, the Company elected to account for lease and
non-lease
components as a single lease component for all asset classes. Additionally, the Company
has contracts that contain
customer premise equipment (i.e.,
set-top
units) for which we apply the
lessor
lease and
non-lease
component practical expedient and account for lease component
s
and
non-lease
components (e.g., service revenue) as a single performance obligation pursuant to ASU 2014-09.
The Company applies
this practical expedient when the lease component would be classified as an operating lease, if accounted for separately, and the service revenue component is the predominant component in the arrangement.
The Company primarily leases real estate, including office space, warehouse space and printing facilities. It also leases satellite transponders for purposes of providing its subscription video service to consumers. These leases were determined to be operating leases in accordance with ASU
2016-02.
The Company’s operating leases generally include options to extend the lease term or terminate the lease. Such options do not impact the Company’s lease term assessment until the Company is reasonably certain that the option will be exercised.
Certain of the Company’s leases include rent adjustments which may be indexed to various metrics, including the consumer price index or other inflationary indexes. As a general matter, the Company’s real estate lease arrangements typically require adjustments resulting from changes in real estate taxes and other costs to operate the leased asset.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In May 2013, the Company’s 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. NaN stock repurchases were made during the three months ended September 30, 2019 and 2018. Through November 1, 2019, the Company cumulatively 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 November 1, 2019 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 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, 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.
The Company did 0t purchase any of its Class B Common Stock during the three months ended September 30, 2019 and 2018
.
In August 2019, 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 16, 2019 to stockholders of record at the close on business on September 11, 2019.
In August 2018, 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 17, 2018 to stockholders of record at the close of business on September 12, 2018.
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 depend on many factors, including the Company’s 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
. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
In accordance with ASC 820, “Fair Value Measurements” (“ASC 820”) fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
| • | Level 2 — Observable inputs other than quoted prices included in Level 1. The Company could value assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data. |
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. For the Company, this primarily includes the use of forecasted financial information and other valuation related assumptions such as discount rates and long term growth rates in the income approach as well as the market approach which utilizes certain market and transaction multiples. |
A rollforward of the Company’s equity securities classified as Level 3 is as follows:
| | | | | | | | | |
| | For the three months ended September 30, | |
| | | | | | |
| | | |
Balance - beginning of period (a) | | $ | | | | $ | | |
| | | | | | | | |
| | | | | | | | ) |
Foreign exchange and other | | | | ) | | | | ) |
| | | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | | |
| (a) | As a result of the adoption of ASU2016-01 during the first quarter of fiscal 2019 , |
Mandatorily redeemable noncontrolling interests
The Company has liabilities recorded in its Balance Sheets for its mandatorily redeemable noncontrolling interests. These liabilities represent management’s best estimate of the amounts expected to be paid in accordance with the contractual terms of the underlying acquisition agreements. The fair values of these liabilities are based on the contractual payout formulas included in the acquisition agreements taking into account the expected performance of the business. Any remeasurements or accretion related to the Company’s mandatorily redeemable noncontrolling interests are recorded through Interest expense, net in the Statements of Operations. As the fair value does not rely on observable market inputs, the Company classifies these liabilities as Level 3 in the fair value hierarchy.
A rollforward of the Company’s mandatorily redeemable noncontrolling interest liabilities classified as Level 3 is as follows:
| | | | | | | | | |
| | For the three months ended September 30, | |
| | | | | | |
| | | |
Balance - beginning of period | | | | | | | | |
| | | | ) | | | | |
| | | | ) | | | | |
| | | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | | |
| (a) | In July 2019, REA Group acquired the remaining 19.7% interest in Smartline Home Loans Pty Limited for approximately $11 million, increasing REA Group’s ownership to 100%. |
The Company is directly and indirectly affected by risks associated with changes in certain market conditions. When deemed appropriate, the Company uses derivative instruments to mitigate the potential impact of these market risks. The primary market risks managed by the Company through the use of derivative instruments include:
| | • | foreign currency exchange rate risk: arising primarily through Foxtel Debt Group borrowings denominated in U.S. dollars and payments for customer premise equipment; and |
| | • | interest rate risk: arising from fixed and floating rate Foxtel Debt Group borrowings. |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company formally designates qualifying derivatives as hedge relationships (“hedges”) and applies hedge accounting when considered appropriate. For economic hedges where no hedge relationship has been designated, changes in fair value are included as a component of net income in each reporting period within Other, net in the Statements of Operations. The Company does not use derivative financial instruments for trading or speculative purposes.
Hedges are classified as current or
non-current
in the Balance Sheets based on their maturity dates. Refer to the table below for further details:
| | | | | | | | | | |
| | | | | | | | |
| | | | | |
Foreign currency derivatives - cash flow hedges | | | | $ | | | | $ | | |
Cross currency interest rate derivatives - fair value hedges | | | | | | | | | | |
Cross currency interest rate derivatives - economic hedges | | | | | | | | | | |
Cross currency interest rate derivatives - cash flow hedges | | | | | | | | | | |
Cross currency interest rate derivatives - fair value hedges | | | | | | | | | | |
Cross currency interest rate derivatives - cash flow hedges | | | | | | | | | | |
Interest rate derivatives - cash flow hedges | | Other current liabilities | | | | ) | | | | ) |
Interest rate derivatives - cash flow hedges | | Other non-current liabilities | | | | ) | | | | ) |
C ross currency interest rate derivatives - cash flow hedges | | Other non-current liabilities | | | | ) | | | | ) |
The following sets forth the effect of fair value hedging relationships on hedged items in the Balance Sheets as of September 30, 2019:
| | | | |
| | | |
| | |
| | | | |
Carrying amount of hedged item | | $ | | |
Cumulative hedging adjustments included in the carrying amount | | | | ) |
The Company utilizes a combination of foreign currency derivatives, interest rate derivatives and cross currency interest rate derivatives to mitigate currency exchange and interest rate risk in relation to future interest payments and payments for customer premise equipment.
The total notional value of foreign currency contract derivatives designated for hedging was $79 million as of September 30, 2019. The maximum hedged term over which the Company is hedging exposure to foreign currency fluctuations is to September 2020. As of September 30, 2019, the Company estimates that
0
net derivative gains related to its foreign currency contract derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.
The total notional value of interest rate swap derivatives designated as cash flow hedges was approximately A$500 million as of September 30, 2019. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to September 2022. As of September 30, 2019, the Company estimates that 0 net derivative gains related to its interest rate swap derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The total notional value of the cross currency interest rate swaps that were designated as cash flow hedges was approximately A$280 million as of September 30, 2019. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024. As of September 30, 2019, the Company estimates that 0 net derivative gains related to its cross currency interest rate swap derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.
The following tables present the impact that changes in the fair values of derivatives designated as cash flow hedges had on Accumulated other comprehensive loss and the Statement of Operations during the three months ended September 30, 2019 and 2018.
| | | | | | | | | | | | | | | | | | |
| | Gain (loss) recognized in
Accumulated | | | (Gain) loss reclassified from
Accumulated | | | |
| | ther c omprehensive l oss for the three months ended
September 30, | | | o ther c omprehensive l oss for the three months ended
September 30, | | | |
| | | | | | | | | | | | | | |
| | | | | |
Derivative instruments designated as cash flow hedges: | | | | | | | | | | | | | | | | | | |
Foreign currency derivatives - cash flow hedges | | $ | | ) | | $ | | | | $ | | ) | | $ | | ) | | |
Cross currency interest rate derivatives - cash flow hedges | | | | | | | | ) | | | | ) | | | | | | Interest income (expense), net |
Interest rate derivatives - cash flow hedges | | | | ) | | | | ) | | | | ) | | | | | | Interest income (expense), net |
| | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | ) | | $ | | ) | | $ | | | | |
| | | | | | | | | | | | | | | | | | | |
Upon adoption of ASU
2017-12,
the Company reclassified $5 million in gains from Accumulated deficit to
A
ccumulated other comprehensive loss related to
amounts
previously recorded
for the ineffective portion of
outstanding derivative instruments designated as cash flow hedges. During the three months ended September 30, 2018
,
the Company
excluded the currency basis from
the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.
Borrowings issued at fixed rates and in U.S. dollars expose the Company to fair value interest rate risk and currency exchange rate risk. The Company manages fair value interest rate risk and currency exchange rate risk through the use of cross currency interest rate swaps under which the Company exchanges fixed interest payments equivalent to the interest payments on the U.S. dollar denominated debt for floating rate Australian dollar denominated interest payments. The changes in fair value of derivatives designated as fair value hedges and the offsetting changes in fair value of the hedged items are recognized in Other, net.
For the three mont
h
s ended
September 30, 2019, such adjustments increased the carrying value of borrowings by approximately $1 million.
The total notional value of the fair value hedges was approximately A$70 million as of September 30, 2019. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024.
During the three months ended September 30, 2019 and 2018, the amount recognized in the Statement of Operations on derivative instruments designated as fair value hedges related to the ineffective portion was NaN, respectively, and the Company
excluded the
currency basis from
the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On December 19, 2013, the NAM Group filed a motion to dismiss the complaint and on March 30, 2016, the District Court dismissed Valassis’s bundling and tying claims. On September 25, 2017, the District Court granted Valassis’s motion to transfer the case to the U.S. District Court for the Southern District of New York (the “N.Y. District Court”). On April 13, 2018, the NAM Group filed a motion for summary judgment dismissing the case which was granted in part and denied in part by the N.Y. District Court on February 21, 2019. The N.Y. District Court found that the NAM Group’s bidding practices were lawful but denied its motion with respect to claims arising out of certain other alleged contracting practices. In addition, the N.Y. District Court also dismissed Valassis’s claims relating to free-standing insert products. While it is not possible at this time to predict with any degree of certainty the ultimate outcome of this action, the NAM Group believes it has been compliant with applicable laws and intends to defend itself vigorously.
Civil claims have been brought against the Company with respect to, among other things, voicemail interception and inappropriate payments to public officials at the Company’s former publication,
, and at
, 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 separation of the Company from Twenty-First Century Fox, Inc. (“21st Century Fox”) on June 28, 2013, 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 such 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 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 Fox’s indemnification obligations with respect to these matters are settled on an
after-tax
basis. In March 2019, as part of the separation of Fox Corporation (“FOX”) from 21st Century Fox, the Company, News Corp Holdings UK & Ireland, 21st Century Fox and FOX entered into a Partial Assignment and Assumption Agreement, pursuant to which, among other things, 21st Century Fox assigned, conveyed and transferred to FOX all of its indemnification obligations with respect to the U.K. Newspaper Matters.
The net expense related to the U.K. Newspaper Matters in Selling, general and administrative was $2 million
for the three months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, 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 $52 million. The amount to be indemnified by FOX of approximately $62 million was recorded as a receivable in Other current assets on the Balance Sheet as of September 30, 2019. 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.
The Company’s 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 Company’s 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, or as settlements or litigations occur.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At the end of each interim period, the Company estimates the annual effective 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 are individually computed and 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.
For the three months ended September 30, 2019, the Company recorded
an
income tax
benefit
of $21 million on
a
pre-tax
loss
of $232 million resulting in an effective tax rate that was
lower
than the U.S. statutory tax rate.
The lower tax rate was primarily due to the lower tax benefit recorded on the impairment of News America Marketing’s goodwill and indefinite-lived intangible assets and by valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses.
For the three months ended September 30, 2018, the Company recorded income tax expense of $
50
million on
p
re-tax
income
of $
178
million, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
Management assesses available evidence to determine whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. Based on management’s assessment of available evidence, it has been determined that it is more likely than not
certain
deferred tax assets in
U.S. Federal, State and
foreign jurisdictions may not be realized and therefore, a valuation allowance has been established against those tax assets.
The Company’s 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 our tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable. The Company is currently undergoing tax examinations by the Internal Revenue Service (the “IRS”) and various U.S. state and foreign jurisdictions. During the year ended June 30, 2018, the IRS commenced an audit of the Company for the year ended June 30, 2014. 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, the Company may need to accrue additional income tax expense and our liability may need to be adjusted as new information becomes known and as these tax examinations continue to progress, or as settlements or litigations occur.
The Company paid gross income taxes of $27 million and $29 million during the three months ended September 30, 2019 and 2018, respectively, and received tax refunds of
$
3
million
and $10 million, respectively.
NOTE 1
2
. SEGMENT INFORMATION
The Company manages and reports its businesses in the following 5 segments:
| | • | News and Information Services The Daily Telegraph, Herald Sun, The Courier Mail The Times, The Sunday Times, The Sun in-store marketing products and services, home-delivered shopper media and digital marketing solutions, including Checkout 51’s mobile app, as well as Unruly, a global video advertising marketplace, Wireless Group, operator of talkSPORT, the leading sports radio network in the U.K., and Storyful, a social media content agency. |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | • | Subscription Video Services pay-TV subscribers and other commercial licensees, primarily via cable, satellite and internet distribution, and consists of (i) the Company’s 65% interest in Foxtel (with the remaining 35% interest in Foxtel held by Telstra, an Australian Securities Exchange (“ASX”)-listed telecommunications company) and (ii)Australian News Channel (“ANC”) . Foxtel is the largest pay-TV provider in Australia, with nearly 200 channels covering sports, general entertainment, movies, documentaries, music, children’s programming and news. Foxtel offers the leading sports programming content in Australia, with broadcast rights to live sporting events including: National Rugby League, Australian Football League, Cricket Australia, the domestic football league, the Australian Rugby Union and various motorsports programming. Foxtel also operates Foxtel Now, an over-the-top, or OTT, service and Kayo, a sports-only OTT service. |
ANC operates the SKY NEWS network, Australia’s
24-hour
multi-channel, multi-platform news service. ANC channels are distributed throughout Australia and New Zealand and available on Foxtel and Sky Network Television NZ. ANC also owns and operates the international Australia Channel IPTV service and offers content across a variety of digital media platforms, including mobile, podcasts and social media websites.
| | • | —The Book Publishing segment consists of HarperCollins, the second largest consumer book publisher in the world, with operations in 17 countries and particular strengths in general fiction, nonfiction, children’s and religious publishing. HarperCollins owns more than 120 branded publishing imprints, including Harper, William Morrow, HarperCollins Children’s Books, Avon, Harlequin and Christian publishers Zondervan and Thomas Nelson, and publishes works by well-known authors such as Harper Lee, Chip and Joanna Gaines, Rick Warren, Sarah Young and Agatha Christie and popular titles such as The Hobbit, Goodnight Moon, To Kill a Mockingbird, Jesus Calling and Hillbilly Elegy |
| | • | Digital Real Estate Services end-to-end digital property search and financing experience and a mortgage broking offering. |
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 offers real estate advertising solutions to agents and brokers, including its Connections
SM
Plus and Advantage
SM
Pro products as well as its Opcity performance and subscription-based services. Move also offers a number of professional software and services products, including Top Producer
®
and ListHub
TM
.
| | • | —The Other segment consists primarily of general corporate overhead expenses, the corporate Strategy Group and costs related to the U.K. Newspaper Matters. The Company’s Strategy Group identifies new products and services across its businesses to increase revenues and profitability and targets and assesses 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, impairment and restructuring charges, equity losses of affiliates, interest (expense) income, net, other, net and income tax (expense) benefit. 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 Company’s chief operating decision maker to evaluate the performance of and allocate resources within the Company’s businesses. Segment EBITDA provides management, investors and equity analysts with a measure to analyze the 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).
| | | | | | | | |
| | | | | | |
| | | | | | |
| | | |
Goodwill and intangible assets, net: | | | | | | | | |
News and Information Services | | $ | | | | $ | | |
Subscription Video Services | | | | | | | | |
| | | | | | | | |
Digital Real Estate Services | | | | | | | | |
| | | | | | | | | |
Total Goodwill and intangible assets, net | | $ | | | | $ | | |
| | | | | | | | | |
NOTE 1
3
. ADDITIONAL FINANCIAL INFORMATION
Receivables are presented net of an allowance for doubtful accounts, which is an estimate of amounts that may not be collectible. The allowance for doubtful accounts is estimated based on historical experience, receivable aging, current economic trends and specific identification of certain receivables that are at risk of not being collected.
Receivables, net consist of:
| | | | | | | | |
| | | | | | |
| | | | | | |
| | | |
| | $ | | | | $ | | |
Allowance for doubtful accounts | | | | ) | | | | ) |
| | | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | | |
The following table sets forth the components of Other
non-current
assets:
| | | | | | | | |
| | | | | | |
| | | | | | |
| | | |
Royalty advances to authors | | $ | | | | $ | | |
Retirement benefit assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
Total Other non-current assets | | $ | | | | $ | | |
| | | | | | | | | |
| (a) | Primarily consists of the non-current portion of programming rights. |
| | • | Liquidity and Capital Resources |
OVERVIEW OF THE COMPANY’S BUSINESSES
The Company manages and reports its businesses in the following five segments:
| | • | News and Information Services in-store marketing products and services, home-delivered shopper media, and digital marketing solutions, including Checkout 51’s mobile app, as well as Unruly, a global video advertising marketplace, Wireless Group, operator of talkSPORT, the leading sports radio network in the U.K., and Storyful, a social media content agency. |
| | • | Subscription Video Services pay-TV subscribers and other commercial licensees, primarily via cable, satellite and internet distribution, and consists of (i) the Company’s 65% interest in Foxtel (with the remaining 35% interest in Foxtel held by Telstra, an Australian Securities Exchange (“ASX”)-listed telecommunications company) and (ii) Australian News Channel (“ANC”). Foxtel is the largestpay-TV provider in Australia, with nearly 200 channels covering sports, general entertainment, movies, documentaries, music, children’s programming and news. Foxtel offers the leading sports programming content in Australia, with broadcast rights to live sporting events including: National Rugby League, Australian Football League, Cricket Australia, the domestic football league, the Australian Rugby Union and various motorsports programming. Foxtel also operates Foxtel Now, anover-the-top, or OTT, service, and Kayo, a sports-only OTT service. |
ANC operates the SKY NEWS network, Australia’s
24-hour
multi-channel, multi-platform news service. ANC channels are distributed throughout Australia and New Zealand and available on Foxtel and Sky Network Television NZ. ANC also owns and operates the international Australia Channel IPTV service and offers content across a variety of digital media platforms, including mobile, podcasts and social media websites.
| | • | —The Book Publishing segment consists of HarperCollins, the second largest consumer book publisher in the world, with operations in 17 countries and particular strengths in general fiction, nonfiction, children’s and religious publishing. HarperCollins owns more than 120 branded publishing imprints, including Harper, William Morrow, HarperCollins Children’s Books, Avon, Harlequin and Christian publishers Zondervan and Thomas Nelson, and publishes works by well-known authors such as Harper Lee, Chip and Joanna Gaines, Rick Warren, Sarah Young and Agatha Christie and popular titles such asThe Hobbit, Goodnight Moon, To Kill a Mockingbird, Jesus Calling |
| | • | Digital Real Estate Services end-to-end digital property search and financing experience and a mortgage broking offering. |
— Operating expenses decreased $3 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019. The decrease in Operating expenses for the three months ended September 30, 2019 was mainly due to lower operating expenses at the News and Information Services segment of $39 million, primarily due to the $18 million positive impact of foreign currency fluctuations, cost savings initiatives and lower newsprint, production and distribution costs. The decrease was offset by higher operating expenses at the Subscription Video Services segment of $20 million, primarily resulting from higher programming costs, and higher operating expenses at the Digital Real Estate Services segment of $10 million, mainly due to the acquisition of and continued investment in Opcity. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in an Operating expense decrease of $44 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019.
Selling, general and administrative
—Selling, general and administrative decreased $44 million, or 5%, for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019. The decrease in Selling, general and administrative for the three months ended September 30, 2019 was mainly due to lower expenses of $39 million at the Subscription Video Services segment, primarily due to lower overhead costs, partially offset by higher expenses at the Other segment, partly related to an increase in equity compensation. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Selling, general and administrative decrease of $27 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019.
Depreciation and amortization
— Depreciation and amortization expense decreased $1 million, or 1%, for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a depreciation and amortization expense decrease of $7 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019.
Impairment and restructuring charges
— During the three months ended September 30, 2019 and 2018, the Company recorded restructuring charges of $24 million and $18 million, respectively.
During the three months ended September 30, 2019, the Company recognized
non-cash
impairment charges of $273 million primarily related to the impairment of goodwill and indefinite-lived intangible assets at the News America Marketing reporting unit.
See Note 3—Impairment and Restructuring Charges in the accompanying Consolidated Financial Statements.
Equity losses of affiliates
— Equity losses of affiliates improved by $1 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019. See Note 4—Investments in the accompanying Consolidated Financial Statements.
Interest income (expense), net
— Interest income (expense), net increased $20 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019, primarily due to the settlement of cash flow hedges related to debt maturities occurring in the first quarter of fiscal 2020 and lower third party interest expense due to repayments of maturing debt facilities.
— Other, net decreased $16 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019. See Note 13—Additional Financial Information in the accompanying Consolidated Financial Statements.
Income tax benefit (expense)
— For the three months ended September 30, 2019, the Company recorded an income tax benefit of $21 million on a
pre-tax
loss of $232 million, resulting in an effective tax rate that was lower than the U.S. statutory tax rate. The lower tax rate was primarily due to the lower tax benefit recorded on the impairment of News America Marketing’s goodwill and indefinite-lived intangible assets and by valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses.
For the three months ended September 30, 2018, the Company recorded income tax expense of $50 million on
pre-tax
income of $178 million resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
Management assesses available evidence to determine whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. Based on management’s assessment of available evidence, it has been determined that it is more likely than not certain deferred tax assets in
U.S. Federal, State and
foreign jurisdictions may not be realized and therefore, a valuation allowance has been established against those tax assets.
— Net loss was $211 million for the three months ended September 30, 2019 as compared to Net income of $128 million in the corresponding period of fiscal 2019. The change in Net (loss) income was primarily due to
non-cash
impairment charges of $273 million primarily related to the impairment of goodwill and indefinite-lived intangible assets at News America Marketing and lower Total Segment EBITDA, partially offset by lower tax expense.
Net income attributable to noncontrolling interests
—Net income attributable to noncontrolling interests decreased by $11 million for the three months ended September 30, 2019 as compared to the corresponding period of fiscal 2019. The decrease in Net income attributable to noncontrolling interests for the three months ended September 30, 2019 was primarily due to lower results at Foxtel and at REA Group.
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 losses of affiliates, interest (expense) income, net, other, net and income tax (expense) benefit. 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 Company’s chief operating decision maker to evaluate the performance of and allocate resources within the Company’s businesses. Segment EBITDA provides management, investors and equity analysts with a measure to analyze the 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).
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. As of September 30, 2019, the Company’s cash and cash equivalents were $1.44 billion. The Company expects these elements of liquidity will enable it to meet its liquidity needs in the foreseeable future, including repayment of indebtedness. The Company also has available borrowing capacity under the Facility (as defined below) and certain other facilities, as described below, and expects to have access to the worldwide credit and capital markets, subject to market conditions, in order to issue additional debt if needed or desired. Although the Company believes that its cash on hand and future cash from operations, together with its access to the credit and 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 performance of the Company and/or its operating subsidiaries, as applicable, (ii) the Company’s credit rating or absence of a credit rating and/or the credit rating of its operating subsidiaries, as applicable, (iii) the provisions of any relevant debt instruments, credit agreements, indentures and similar or associated documents, (iv) the liquidity of the overall credit and capital markets and (v) the current state of the economy. There can be no assurances that the Company will continue to have access to the credit and capital markets on acceptable terms. See Part II, “Item 1A. Risk Factors” for further discussion.
As of September 30, 2019, the Company’s consolidated assets included $537 million in cash and cash equivalents that were held by its foreign subsidiaries. Of this amount, $53 million is cash 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 earnings. 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 controls and 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 and paper purchases; capital expenditures; income tax payments; investments in associated entities; acquisitions; and the repayment of debt and related interest. In addition to the acquisitions and dispositions disclosed elsewhere, the Company has evaluated, and expects to continue to evaluate, possible future 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.
Issuer Purchases of Equity Securities
In May 2013, the Company’s 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. No stock repurchases were made during the three months ended September 30, 2019 and 2018. Through November 1, 2019, the Company cumulatively 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 November 1, 2019 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 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, 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.
