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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2009 |
or
¨ | 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 001-32352
NEWS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware | 26-0075658 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
1211 Avenue of the Americas, New York, New York | 10036 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code (212) 852-7000
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of January 29, 2010, 1,821,687,852 shares of Class A Common Stock, par value $0.01 per share, and 798,520,953 shares of Class B Common Stock, par value $0.01 per share, were outstanding.
Table of Contents
FORM 10-Q
TABLE OF CONTENTS
Page | ||||
Part I. Financial Information |
||||
Item 1. |
Financial Statements |
|||
3 | ||||
Unaudited Consolidated Balance Sheets at December 31, 2009 and June 30, 2009 |
4 | |||
Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2009 and 2008 |
5 | |||
6 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
40 | ||
Item 3. |
60 | |||
Item 4. |
62 | |||
Part II. Other Information | ||||
Item 1. |
62 | |||
Item 1A. |
62 | |||
Item 2. |
65 | |||
Item 3. |
65 | |||
Item 4. |
66 | |||
Item 5. |
66 | |||
Item 6. |
66 | |||
67 |
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UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
$ | 8,684 | $ | 7,871 | $ | 15,883 | $ | 15,380 | ||||||||
Operating expenses |
(5,630 | ) | (5,161 | ) | (10,035 | ) | (9,732 | ) | ||||||||
Selling, general and administrative |
(2,043 | ) | (1,588 | ) | (3,478 | ) | (3,269 | ) | ||||||||
Depreciation and amortization |
(299 | ) | (283 | ) | (596 | ) | (579 | ) | ||||||||
Impairment and restructuring charges |
(10 | ) | (8,465 | ) | (30 | ) | (8,473 | ) | ||||||||
Equity earnings (losses) of affiliates |
58 | 30 | 90 | (329 | ) | |||||||||||
Interest expense, net |
(269 | ) | (231 | ) | (514 | ) | (452 | ) | ||||||||
Interest income |
16 | 20 | 41 | 60 | ||||||||||||
Other, net |
(86 | ) | (98 | ) | (98 | ) | 206 | |||||||||
Income (loss) before income tax expense |
421 | (7,905 | ) | 1,263 | (7,188 | ) | ||||||||||
Income tax (expense) benefit |
(137 | ) | 1,514 | (382 | ) | 1,333 | ||||||||||
Net income (loss) |
284 | (6,391 | ) | 881 | (5,855 | ) | ||||||||||
Less: Net income attributable to noncontrolling interests |
(30 | ) | (26 | ) | (56 | ) | (47 | ) | ||||||||
Net income (loss) attributable to News Corporation stockholders |
$ | 254 | $ | (6,417 | ) | $ | 825 | $ | (5,902 | ) | ||||||
Dividends declared per share |
$ | | $ | | $ | 0.06 | $ | 0.06 | ||||||||
Weighted average shares: |
||||||||||||||||
Basic |
2,620 | 2,614 | 2,618 | 2,612 | ||||||||||||
Diluted |
2,622 | 2,614 | 2,620 | 2,612 | ||||||||||||
Net income (loss) attributable to News Corporation stockholders per share: |
||||||||||||||||
Basic |
$ | 0.10 | $ | (2.45 | ) | $ | 0.32 | $ | (2.26 | ) | ||||||
Diluted |
$ | 0.10 | $ | (2.45 | ) | $ | 0.31 | $ | (2.26 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
At December 31, 2009 |
At June 30, 2009 | |||||
Assets: |
||||||
Current assets: |
||||||
Cash and cash equivalents |
$ | 7,266 | $ | 6,540 | ||
Receivables, net |
7,516 | 6,287 | ||||
Inventories, net |
2,995 | 2,477 | ||||
Other |
558 | 532 | ||||
Total current assets |
18,335 | 15,836 | ||||
Non-current assets: |
||||||
Receivables |
235 | 282 | ||||
Investments |
3,162 | 2,957 | ||||
Inventories, net |
3,506 | 3,178 | ||||
Property, plant and equipment, net |
6,220 | 6,245 | ||||
Intangible assets, net |
8,893 | 8,925 | ||||
Goodwill |
14,465 | 14,382 | ||||
Other non-current assets |
1,317 | 1,316 | ||||
Total assets |
$ | 56,133 | $ | 53,121 | ||
Liabilities and Equity: |
||||||
Current liabilities: |
||||||
Borrowings |
$ | 1,840 | $ | 2,085 | ||
Accounts payable, accrued expenses and other current liabilities |
5,983 | 5,279 | ||||
Participations, residuals and royalties payable |
1,440 | 1,388 | ||||
Program rights payable |
1,124 | 1,115 | ||||
Deferred revenue |
806 | 772 | ||||
Total current liabilities |
11,193 | 10,639 | ||||
Non-current liabilities: |
||||||
Borrowings |
13,435 | 12,204 | ||||
Other liabilities |
2,980 | 3,027 | ||||
Deferred income taxes |
3,330 | 3,276 | ||||
Redeemable noncontrolling interests |
365 | 343 | ||||
Commitments and contingencies |
||||||
Equity: |
||||||
Class A common stock (1) |
18 | 18 | ||||
Class B common stock (2) |
8 | 8 | ||||
Additional paid-in capital |
17,283 | 17,354 | ||||
Retained earnings and accumulated other comprehensive income |
7,092 | 5,844 | ||||
Total News Corporation stockholders equity |
24,401 | 23,224 | ||||
Noncontrolling interests |
429 | 408 | ||||
Total equity |
24,830 | 23,632 | ||||
Total liabilities and equity |
$ | 56,133 | $ | 53,121 | ||
(1) | Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 1,821,526,826 shares and 1,815,449,495 shares issued and outstanding, net of 1,776,859,314 and 1,776,865,809 treasury shares at par at December 31, 2009 and June 30, 2009, respectively. |
(2) | Class B common stock, $0.01 par value per share, 3,000,000,000 shares authorized, 798,520,953 shares issued and outstanding, net of 313,721,702 treasury shares at par at December 31, 2009 and June 30, 2009. |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
For the six months ended December 31, |
||||||||
2009 | 2008 | |||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 881 | $ | (5,855 | ) | |||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
596 | 579 | ||||||
Amortization of cable distribution investments |
45 | 42 | ||||||
Equity (earnings) losses of affiliates |
(90 | ) | 329 | |||||
Cash distributions received from affiliates |
152 | 140 | ||||||
Impairment charges (net of tax of $1.7 billion) |
| 6,737 | ||||||
Other, net |
98 | (206 | ) | |||||
Change in operating assets and liabilities, net of acquisitions: |
||||||||
Receivables and other assets |
(1,172 | ) | (519 | ) | ||||
Inventories, net |
(880 | ) | (858 | ) | ||||
Accounts payable and other liabilities |
934 | (784 | ) | |||||
Net cash provided by (used in) operating activities |
564 | (395 | ) | |||||
Investing activities: |
||||||||
Property, plant and equipment, net of acquisitions |
(388 | ) | (591 | ) | ||||
Acquisitions, net of cash acquired |
(93 | ) | (462 | ) | ||||
Investments in equity affiliates |
(139 | ) | (34 | ) | ||||
Other investments |
(64 | ) | (33 | ) | ||||
Proceeds from sale of investments, other non-current assets and business disposals |
36 | 973 | ||||||
Net cash used in investing activities |
(648 | ) | (147 | ) | ||||
Financing activities: |
||||||||
Borrowings |
1,010 | 47 | ||||||
Repayment of borrowings |
(75 | ) | (255 | ) | ||||
Issuance of shares |
21 | 4 | ||||||
Dividends paid |
(183 | ) | (177 | ) | ||||
Purchase of subsidiary shares from noncontrolling interest |
| (11 | ) | |||||
Other, net |
2 | 18 | ||||||
Net cash provided by (used in) financing activities |
775 | (374 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
691 | (916 | ) | |||||
Cash and cash equivalents, beginning of period |
6,540 | 4,662 | ||||||
Exchange movement of opening cash balance |
35 | (125 | ) | |||||
Cash and cash equivalents, end of period |
$ | 7,266 | $ | 3,621 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1Basis of Presentation
News Corporation, a Delaware corporation, with its subsidiaries (together News Corporation or the Company), is a diversified global media company, which manages and reports its businesses in eight segments: Filmed Entertainment, Television, Cable Network Programming (which now includes STAR Group Limited (STAR) see Note 15Segment Information), Direct Broadcast Satellite Television (DBS), Integrated Marketing Services (formerly Magazines and Inserts, see Note 15Segment Information), Newspapers and Information Services, Book Publishing and Other.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (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 unaudited consolidated financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010.
These interim unaudited 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, 2009 as filed with the Securities and Exchange Commission (SEC) on August 12, 2009 (the 2009 Form 10-K).
The consolidated financial statements include the accounts of News Corporation and its subsidiaries. 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 preparation of consolidated financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.
Certain fiscal 2009 amounts have been reclassified to conform to the fiscal 2010 presentation.
The Company maintains a 52-53 week fiscal year ending on the Sunday nearest to each reporting date. As such, all references to December 31, 2009 and December 31, 2008 relate to the three and six month periods ended December 27, 2009 and December 28, 2008, respectively. For convenience purposes, the Company continues to date its financial statements as of December 31.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In accordance with Accounting Standards Codification (ASC) 220 Comprehensive Income, total comprehensive income (loss) for the Company consisted of the following:
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Net income (loss), as reported |
$ | 284 | $ | (6,391 | ) | $ | 881 | $ | (5,855 | ) | ||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustments |
67 | (1,461 | ) | 459 | (2,606 | ) | ||||||||||
Unrealized holding gains (losses) on securities, net of tax |
13 | (17 | ) | 57 | (35 | ) | ||||||||||
Benefit plan adjustments |
3 | (12 | ) | 12 | (10 | ) | ||||||||||
Total comprehensive income (loss) |
367 | (7,881 | ) | 1,409 | (8,506 | ) | ||||||||||
Less: net income attributable to noncontrolling interests (1) |
(30 | ) | (26 | ) | (56 | ) | (47 | ) | ||||||||
Less: foreign currency translation adjustments attributable to noncontrolling interests (1) |
5 | 27 | | 40 | ||||||||||||
Comprehensive income (loss) attributable to News Corporation stockholders |
$ | 342 | $ | (7,880 | ) | $ | 1,353 | $ | (8,513 | ) | ||||||
(1) | Includes amounts relating to noncontrolling interests classified as equity and redeemable noncontrolling interests classified as temporary equity. |
Recent Accounting Pronouncements
On July 1, 2009, the Company adopted the provisions of ASC 805 Business Combinations (ASC 805), which significantly changed the Companys accounting for business combinations on a prospective basis in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under ASC 805, changes in an acquired entitys deferred tax assets and uncertain tax positions after the measurement period are included in income tax expense.
On July 1, 2009, the Company adopted the new provisions of ASC 810 Consolidation (ASC 810), which changed the accounting and reporting for minority interests. As a result of the adoption of these provisions, minority interests have been recharacterized as noncontrolling interests and classified as a component of equity, with the exception of redeemable noncontrolling interests. In accordance with ASC 810, the presentation and disclosure requirements for existing noncontrolling interests were applied retrospectively. All other requirements of these provisions were applied prospectively.
The following table summarizes changes in equity (in millions):
For the three months ended December 31, | |||||||||||||||||||||||
2009 | 2008 | ||||||||||||||||||||||
News Corporation Stockholders |
Noncontrolling Interests |
Total Equity | News Corporation Stockholders |
Noncontrolling Interests |
Total Equity | ||||||||||||||||||
Balance, beginning of period |
$ | 24,053 | $ | 426 | $ | 24,479 | $ | 27,820 | $ | 642 | $ | 28,462 | |||||||||||
Net income (loss) |
254 | 26 | (a) | 280 | (6,417 | ) | 21 | (a) | (6,396 | ) | |||||||||||||
Other comprehensive income (loss) |
88 | (2 | )(b) | 86 | (1,463 | ) | (18 | )(b) | (1,481 | ) | |||||||||||||
Issuance of shares |
1 | | 1 | 9 | | 9 | |||||||||||||||||
Other |
5 | (21 | )(c) | (16 | ) | 48 | (15 | )(c) | 33 | ||||||||||||||
Balance, end of period |
$ | 24,401 | $ | 429 | $ | 24,830 | $ | 19,997 | $ | 630 | $ | 20,627 | |||||||||||
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the six months ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
News Corporation Stockholders |
Noncontrolling Interests |
Total Equity | News Corporation Stockholders |
Noncontrolling Interests |
Total Equity | |||||||||||||||||||
Balance, beginning of period |
$ | 23,224 | $ | 408 | $ | 23,632 | $ | 28,623 | $ | 631 | $ | 29,254 | ||||||||||||
Net income (loss) |
825 | 49 | (a) | 874 | (5,902 | ) | 40 | (a) | (5,862 | ) | ||||||||||||||
Other comprehensive income (loss) |
528 | 3 | (b) | 531 | (2,611 | ) | (26 | )(b) | (2,637 | ) | ||||||||||||||
Issuance of shares |
70 | | 70 | 75 | | 75 | ||||||||||||||||||
Dividends declared |
(157 | ) | | (157 | ) | (157 | ) | | (157 | ) | ||||||||||||||
Other |
(89 | ) | (31 | )(c) | (120 | ) | (31 | ) | (15 | )(c) | (46 | ) | ||||||||||||
Balance, end of period |
$ | 24,401 | $ | 429 | $ | 24,830 | $ | 19,997 | $ | 630 | $ | 20,627 | ||||||||||||
(a) | Net income attributable to noncontrolling interests excludes $4 million and $5 million for the three months ended December 31, 2009 and 2008, respectively, and $7 million for the six months ended December 31, 2009 and 2008 relating to redeemable noncontrolling interests which are reflected in temporary equity. |
(b) | Other comprehensive income (loss) attributable to noncontrolling interests excludes $(3) million and $(9) million for the three months ended December 31, 2009 and 2008, respectively, and $(3) million and $(14) million for the six months ended December 31, 2009 and 2008, respectively, relating to redeemable noncontrolling interests. |
(c) | Other activity attributable to noncontrolling interests excludes $22 million and $(148) million for the three months ended December 31, 2009 and 2008, respectively, and $18 million and $(134) million for the six months ended December 31, 2009 and 2008, respectively, relating to redeemable noncontrolling interests. |
On July 1, 2009, the Company adopted the new provisions of ASC 350 IntangiblesGoodwill and Other (ASC 350), which set forth the factors to be considered in developing renewal or extension assumptions used to determine the useful life of a recognizable intangible asset and is intended to improve the consistency between the useful life of a recognizable intangible asset and the period of expected cash flows used to measure the fair value of that asset. This adoption changed the Companys determination of useful lives for intangible assets on a prospective basis.
On July 1, 2009, the Company adopted the additional provisions of ASC 820 Fair Value Measurement and Disclosure (ASC 820), which apply to non-recurring fair value measurements of non-financial assets and liabilities, such as measurement of potential impairments of goodwill, other intangible assets, other long-lived assets and non-financial assets held by a pension plan. These additional provisions also apply to the fair value measurements of non-financial assets acquired and liabilities assumed in business combinations. The Companys adoption of the additional provisions of ASC 820 did not have a material effect on the Companys consolidated financial statements.
In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-05 Fair Value Measurements and Disclosures (Topic 820)Measuring Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 amends Subtopic 820-10 Fair Value Measurements and DisclosuresOverall and provides clarification on the methods to be used in circumstances in which a quoted price in an active market for the identical liability is not available.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In June 2010, the Company will adopt the new provisions of ASC 715 CompensationRetirement Benefits, which expand the disclosure requirements of defined benefit plans. The expanded disclosure requirements include: (i) investment policies and strategies; (ii) the major categories of plan assets; (iii) the inputs and valuation techniques used to measure plan assets; (iv) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and (v) significant concentrations of risk within plan assets.
Note 2Acquisitions, Disposals and Other Transactions
Fiscal 2010 Transactions
In December 2009, the Company entered into an agreement to sell its Photobucket subsidiary, a web-based provider of photo- and video-sharing services, to a mobile photo uploading platform in exchange for an equity interest in the acquirer. A loss of approximately $29 million on this transaction was included in other, net in the unaudited consolidated statements of operations for the three and six months ended December 31, 2009. As a result of this transaction, the Companys interest in the acquirer, which is not material, was recorded at fair value and is now accounted for under the equity method of accounting.
Fiscal 2009 Transactions
Acquisitions
In October 2008, the Company purchased VeriSign Inc.s minority share of the Jamba joint venture for approximately $193 million in cash, increasing the Companys interest to 100%.
In January 2009, the Company and Asianet TV Holdings Private Limited (Asianet) formed a venture (Star Jupiter) to provide general entertainment channels in southern India. The Company paid approximately $235 million in cash and assumed net debt of approximately $20 million for a controlling interest in four of Asianets channels which were combined with one of the Companys existing channels. The Company has a majority interest in this new venture and, accordingly, began consolidating the results in January 2009.
The aforementioned acquisitions were all accounted for in accordance with ASC 805. The excess purchase price that has been allocated or has been preliminarily allocated to goodwill is not being amortized for all of the acquisitions noted above in accordance with ASC 350. Where the allocation of the excess purchase price is not final, the amount allocated to goodwill is subject to change upon completion of final valuations of certain assets and liabilities. A future reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets could reduce future earnings as a result of additional amortization.
Disposals
In July 2008, the Company completed the sale of eight of its owned-and-operated FOX network affiliated television stations (the Stations) for approximately $1 billion in cash. The Stations included: WJW in Cleveland, OH; KDVR in Denver, CO; KTVI in St. Louis, MO; WDAF in Kansas City, MO; WITI in Milwaukee, WI; KSTU in Salt Lake City, UT; WBRC in Birmingham, AL; and WGHP in Greensboro, NC. In connection with the transaction, the Stations entered into new affiliation agreements with the Company to receive network programming and assumed existing contracts with the Company for syndicated programming. No portion of the sale proceeds were allocated to the new network affiliation agreements as they were negotiated at fair value and are consistent with similar pre-existing contracts with other third party-owned FOX affiliated stations. In addition, the Company recorded a gain of approximately $232 million in other, net in the unaudited consolidated statements of operations during the six months ended December 31, 2008.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In November 2008, the Company sold its ownership stake in a Polish television broadcaster to the remaining shareholders. The Company recognized a net loss of approximately $100 million on the disposal which was included in other, net in the unaudited consolidated statements of operations during the three and six months ended December 31, 2008.
Other transactions
In February 2009, the Company, two newly incorporated subsidiaries of funds advised by Permira Advisers LLP (the Permira Newcos) and the Companys then majority-owned, publicly-held subsidiary, NDS Group plc (NDS), completed a transaction pursuant to which all issued and outstanding NDS Series A ordinary shares, including those represented by American Depositary Shares traded on The NASDAQ Stock Market, were acquired for per-share consideration of $63 in cash (the NDS Transaction). As part of the NDS Transaction, approximately 67% of the NDS Series B ordinary shares held by the Company were exchanged for $63 per share in a mix of approximately $1.5 billion in cash, which included $780 million of cash retained upon the deconsolidation of NDS, and a $242 million vendor note. Immediately prior to the consummation of the NDS Transaction, the Company owned approximately 72% of NDS through its ownership of all of the outstanding NDS Series B ordinary shares and, accordingly, included the results of NDS in the consolidated financial statements of the Company. As a result of the NDS Transaction, NDS ceased to be a public company and the Permira Newcos and the Company now own approximately 51% and 49% of NDS, respectively. The Companys remaining interest in NDS is accounted for under the equity method of accounting. A gain of $1.2 billion was recognized on the sale of the Companys interest in NDS and was included in other, net in the unaudited consolidated statements of operations in the third quarter of fiscal 2009.
Note 3Receivables, net
Receivables, net consisted of:
At December 31, 2009 |
At June 30, 2009 |
|||||||
(in millions) | ||||||||
Total receivables |
$ | 9,136 | $ | 7,727 | ||||
Allowances for returns and doubtful accounts |
(1,385 | ) | (1,158 | ) | ||||
Total receivables, net |
7,751 | 6,569 | ||||||
Less: current receivables, net |
(7,516 | ) | (6,287 | ) | ||||
Non-current receivables, net |
$ | 235 | $ | 282 | ||||
Note 4Restructuring Programs
In fiscal 2009, certain of the markets in which the Companys businesses operate experienced a weakening in the economic climate which adversely affected advertising revenue and other consumer driven spending. As a result, a number of the Companys businesses implemented a series of operational actions to address the Companys cost structure, including the Companys digital media properties, which were restructured to align resources more closely with business priorities. This restructuring program included significant job reductions, both domestically and internationally, to enable the businesses to operate on a more cost effective basis. In conjunction with this project, the Company also eliminated excess facility requirements. Several other businesses of the Company implemented similar plans in fiscal 2009, including its U.K. and Australian newspapers, HarperCollins, MyNetworkTV and the Fox Television Stations. During the fiscal year ended June 30, 2009, the Company recorded restructuring charges in accordance with ASC 420 Exit or Disposal Cost Obligations of approximately $312 million which were included in impairment and restructuring charges in the unaudited consolidated statements of operations.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During the three and six months ended December 31, 2009, the Company recorded additional restructuring charges of approximately $10 million and $30 million, respectively. The restructuring charges for the three months ended December 31, 2009 reflect approximately $10 million recorded at the Other segment related to a restructuring program at the Companys Fox Mobile Entertainment division and accretion on facility termination obligations. The restructuring charges for the six months ended December 31, 2009 reflect an $18 million charge related to the sales and distribution operations of the STAR channels and a $12 million charge at the Other segment related to the restructuring program at the Companys Fox Mobile Entertainment division and accretion on facility termination obligations.
Changes in the program liabilities were as follows:
For the three months ended December 31, 2009 | ||||||||||||||||
One time termination benefits |
Facility related costs |
Other costs | Total | |||||||||||||
(in millions) | ||||||||||||||||
Beginning of period |
$ | 37 | $ | 166 | $ | 8 | $ | 211 | ||||||||
Additions |
5 | 3 | 2 | 10 | ||||||||||||
Payments |
(14 | ) | (7 | ) | (2 | ) | (23 | ) | ||||||||
End of period |
$ | 28 | $ | 162 | $ | 8 | $ | 198 | ||||||||
For the six months ended December 31, 2009 | ||||||||||||||||
One time termination benefits |
Facility related costs |
Other costs | Total | |||||||||||||
(in millions) | ||||||||||||||||
Beginning of period |
$ | 65 | $ | 164 | $ | 8 | $ | 237 | ||||||||
Additions |
18 | 10 | 2 | 30 | ||||||||||||
Payments |
(55 | ) | (12 | ) | (2 | ) | (69 | ) | ||||||||
End of period |
$ | 28 | $ | 162 | $ | 8 | $ | 198 | ||||||||
The Company expects to record an additional $69 million of restructuring charges principally related to accretion on facility termination obligations through fiscal 2021. At December 31, 2009, restructuring liabilities of approximately $73 million and $125 million were included in the unaudited consolidated balance sheets in other current liabilities and other liabilities, respectively. Facility related costs of $125 million included in other liabilities and additional accretion are expected to be paid through fiscal 2021.
Dow Jones
As a result of the Dow Jones & Company, Inc. (Dow Jones) acquisition in fiscal 2008, the Company established and approved plans to integrate the acquired operations into the Newspapers and Information Services segment. The cost to implement these plans consists of separation payments for certain Dow Jones executives under the change in control plan Dow Jones had established prior to the acquisition, non-cancelable lease commitments and lease termination charges for leased facilities that have or will be exited and other contract termination costs associated with the restructuring activities.
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Changes in the plan liabilities were as follows (in millions):
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Beginning of period |
$ | 107 | $ | 168 | $ | 126 | $ | 180 | ||||||||
Additions |
| 25 | | 40 | ||||||||||||
Payments |
(9 | ) | (22 | ) | (28 | ) | (49 | ) | ||||||||
End of period |
$ | 98 | $ | 171 | $ | 98 | $ | 171 | ||||||||
The balance of the plan liabilities as of December 31, 2009 primarily includes facility related costs.
Note 5Inventories, net
The Companys inventories were comprised of the following:
At December 31, 2009 |
At June 30, 2009 |
|||||||
(in millions) | ||||||||
Programming rights |
$ | 3,532 | $ | 3,038 | ||||
Books, DVDs, paper and other merchandise |
427 | 361 | ||||||
Filmed entertainment costs: |
||||||||
Films: |
||||||||
Released (including acquired film libraries) |
600 | 533 | ||||||
Completed, not released |
46 | 137 | ||||||
In production |
874 | 664 | ||||||
In development or preproduction |
74 | 73 | ||||||
1,594 | 1,407 | |||||||
Television productions: |
||||||||
Released (including acquired libraries) |
643 | 589 | ||||||
Completed, not released |
| | ||||||
In production |
302 | 256 | ||||||
In development or preproduction |
3 | 4 | ||||||
948 | 849 | |||||||
Total filmed entertainment costs, less accumulated amortization (a) |
2,542 | 2,256 | ||||||
Total inventories, net |
6,501 | 5,655 | ||||||
Less: current portion of inventory, net (b) |
(2,995 | ) | (2,477 | ) | ||||
Total noncurrent inventories, net |
$ | 3,506 | $ | 3,178 | ||||
(a) | Does not include $475 million and $491 million of net intangible film library costs as of December 31, 2009 and June 30, 2009, respectively, which are included in intangible assets subject to amortization in the unaudited consolidated balance sheets. |
(b) | Current inventory as of December 31, 2009 and June 30, 2009 was comprised of programming rights ($2,600 million and $2,149 million, respectively), books, DVDs, paper and other merchandise. |
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Note 6Investments
The Companys investments were comprised of the following:
Ownership Percentage |
At December 31, 2009 |
At June 30, 2009 | |||||||||
(in millions) | |||||||||||
Equity method investments: |
|||||||||||
British Sky Broadcasting Group plc (1) |
U.K. DBS operator | 39 | % | $ | 962 | $ | 877 | ||||
Sky Deutschland AG (1) |
German pay-TV operator | 40 | %(2) | 311 | 437 | ||||||
Sky Network Television Ltd. (1) |
New Zealand media company | 44 | % | 336 | 305 | ||||||
NDS |
Digital technology company | 49 | % | 258 | 232 | ||||||
Other equity method investments |
various | 827 | 707 | ||||||||
Fair value of available-for-sale investments |
various | 237 | 150 | ||||||||
Other investments |
various | 231 | 249 | ||||||||
$ | 3,162 | $ | 2,957 | ||||||||
(1) | The market value of the Companys investment in British Sky Broadcasting Group plc (BSkyB), Sky Deutschland AG (Sky Deutschland) and Sky Network Television Ltd. was $6,142 million, $622 million and $590 million at December 31, 2009, respectively. |
(2) | During the first quarter of fiscal 2010, the Company entered into a series of purchase transactions resulting in the Company increasing its interest in Sky Deutschland. (See Fiscal Year 2010 Transactions below for further discussion) |
The cost basis, unrealized gains, unrealized losses and fair market value of available-for-sale investments are set forth below:
At December 31, 2009 |
At June 30, 2009 |
||||||
(in millions) | |||||||
Cost basis of available-for-sale investments |
$ | 37 | $ | 38 | |||
Accumulated gross unrealized gain |
200 | 113 | |||||
Accumulated gross unrealized loss |
| (1 | ) | ||||
Fair value of available-for-sale investments |
$ | 237 | $ | 150 | |||
Deferred tax liability |
$ | 70 | $ | 39 | |||
Fiscal Year 2010 Transactions
During the first quarter of fiscal 2010, the Company acquired additional shares of Sky Deutschland, increasing its ownership from approximately 38% at June 30, 2009 to approximately 40% at December 31, 2009.
In December 2009, the Company announced that it had entered into an agreement with Sky Deutschland to subscribe to up to 49 million in newly registered shares of Sky Deutschland pursuant to a capital increase. Sky Deutschland completed this capital increase in January 2010 and, accordingly, the Company purchased 49 million newly registered shares of Sky Deutschland at a price of 2.25 per new share for an aggregate cost of approximately $158 million. As a result, News Corporations stake in Sky Deutschland increased to approximately 45%.
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Fiscal Year 2009 Transactions
Investment in Sky Deutschland
During fiscal 2009, the Company entered into an agreement with Sky Deutschland and the bank syndicate of Sky Deutschland to provide Sky Deutschland with a new financing structure and additional capital through two equity capital increases. As a result of the rights issues and other transactions, the Company invested an aggregate of approximately $300 million in shares of Sky Deutschland during fiscal 2009 and, as of June 30, 2009, the Company had an approximate 38% ownership interest in Sky Deutschland.
Impairment of Investments in Sky Deutschland
On October 2, 2008, Sky Deutschland announced guidance on its earnings before interest, taxes, depreciation and amortization (EBITDA) indicating results substantially below prior guidance for calendar 2008. Sky Deutschland also announced that it had adopted a new classification of subscribers at September 30, 2008. The day after this announcement, Sky Deutschland experienced a significant decline in its market value. As a result of this decline, the Companys carrying value in Sky Deutschland exceeded its market value based upon Sky Deutschlands closing share price of 4.38 on October 3, 2008. The Company believed that this decline was not temporary based on the assessment described below and, accordingly, recorded an impairment charge of $422 million representing the difference between the Companys carrying value and the market value. The impairment charge was included in Equity earnings (losses) of affiliates in the Companys unaudited consolidated statements of operations during the six months ended December 31, 2008.
In determining if the decline in Sky Deutschlands market value was other-than-temporary, the Company considered a number of factors: (1) the financial condition, operating performance and near term prospects of Sky Deutschland; (2) the reason for the decline in Sky Deutschlands fair value; (3) analysts ratings and estimates of 12 month share price targets for Sky Deutschland; and (4) the length of time and the extent to which Sky Deutschlands market value had been less than the carrying value of the Companys investment.
Other
In August 2008, the Company entered into an agreement providing for the restructuring of the Companys content acquisition agreements with Balaji Telefilms Ltd (Balaji). As part of this restructuring agreement, the Company no longer has representation on Balajis board of directors and does not have significant influence in management decisions; therefore, the Company believes that it no longer has the ability to exercise significant influence over Balaji. Accordingly, the Company accounts for its investment in Balaji under the cost method of accounting and the carrying value is adjusted to market value each reporting period as required under ASC 320 Investments.
In February 2009, the NDS Transaction was completed, resulting in the Permira Newcos and the Company owning approximately 51% and 49% of NDS, respectively. The Companys remaining interest in NDS is accounted for under the equity method of accounting. (See Note 2Acquisitions, Disposals and Other Transactions for further discussion)
Note 7Fair Value
In accordance with 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: (i) inputs that are quoted prices in active markets (Level 1); (ii) inputs other than quoted prices included within Level 1 that
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are observable, including quoted prices for similar assets or liabilities (Level 2); and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (Level 3). Additionally, in accordance with ASC 815 Derivatives and Hedging (ASC 815), the Company has included additional disclosures about the Companys derivatives and hedging activities (Level 2).
The table below presents information about financial assets and liabilities carried at fair value on a recurring basis as of December 31, 2009:
Description |
Total as of December 31, 2009 |
Fair Value Measurements at Reporting Date Using | |||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(in millions) | |||||||||||||||
Assets |
|||||||||||||||
Available-for-sale securities (1) |
$ | 237 | $ | 237 | $ | | $ | | |||||||
Liabilities |
|||||||||||||||
Derivatives (2) |
(12 | ) | | (12 | ) | | |||||||||
Redeemable noncontrolling interests (3) |
(365 | ) | | | (365 | ) | |||||||||
Total |
$ | (140 | ) | $ | 237 | $ | (12 | ) | $ | (365 | ) | ||||
(1) | See Note 6Investments. |
(2) | Represents derivatives associated with the Companys exchangeable securities and foreign exchange forward contracts designated as hedges and other financial instruments. As of December 31, 2009, fair value of warrants related to the TOPrS of approximately $8 million was included in non-current liabilities. In addition to this amount was the fair value of the foreign exchange forward contracts of approximately $4 million which are recorded in the underlying hedged balances. Cash flows from the settlement of foreign exchange forward contracts (which generally occurs within 12 months from the inception of the contracts) offset cash flows from the underlying hedged item and are included in operating activities in the consolidated statements of cash flows. The Company uses financial instruments designated as cash flow hedges primarily to hedge its limited exposures to foreign currency exchange risks associated with the cost for producing or acquiring films and television programming abroad. The effective changes in fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income with foreign currency translation adjustments. Amounts are reclassified from accumulated other comprehensive income when the underlying hedged item is recognized in earnings. If derivatives are not designated as hedges, changes in fair value are recorded in earnings. |
(3) | The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A Distinguishing Liabilities from Equity because their exercise is outside the control of the Company and, accordingly, has included the fair value of the redeemable noncontrolling interests in the unaudited consolidated balance sheets. The redeemable noncontrolling interests recorded at fair value include put arrangements held by the noncontrolling interests in one of the Companys majority-owned regional sports networks (RSN), in a majority-owned outdoor marketing subsidiary of the Company and in one of the Companys Asian general entertainment television joint ventures. |
The fair value of the redeemable noncontrolling interest in the Companys RSN was determined by using a discounted EBITDA valuation model, assuming a 9.5% discount rate.
The fair value of the redeemable noncontrolling interest in the majorityowned outdoor marketing subsidiary was determined using a discounted cash flow analysis assuming a 5% terminal growth rate and a 15% discount rate.
The fair value of the redeemable noncontrolling interest in the Asian general entertainment television joint venture was determined using discounted cash flow analysis assuming a multiple of eight times terminal year EBITDA.
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The changes in fair value of liabilities classified as Level 3 measurements during the six months ended December 31, 2009 were as follows:
For the six months ended December 31, 2009 |
||||
(in millions) | ||||
Beginning of period |
$ | (343 | ) | |
Total gains (losses) included in Net income |
(7 | ) | ||
Other |
(15 | ) | ||
End of period |
$ | (365 | ) | |
Financial Instruments
The carrying value of the Companys financial instruments, including cash and cash equivalents, receivables, payables and cost investments, approximates fair value.
The aggregate fair value of the Companys borrowing at December 31, 2009 was approximately $16.3 billion compared with a carrying value of approximately $15.3 billion and, at June 30, 2009, was approximately $13.5 billion compared with a carrying value of approximately $14.3 billion. Fair value is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market.
Concentrations of Credit Risk
Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
The Companys receivables do not represent significant concentrations of credit risk at December 31, 2009 or June 30, 2009 due to the wide variety of customers, markets and geographic areas to which the Companys products and services are sold.
The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At December 31, 2009, the Company did not anticipate nonperformance by any of the counterparties.
Note 8Goodwill and Other Intangible Assets
During the six months ended December 31, 2009, the change in the carrying value of goodwill was primarily due to foreign currency translation adjustments. The change in the carrying value of intangible assets during the six months ended December 31, 2009 was primarily due to amortization expense partially offset by foreign currency translation adjustments.
During the second quarter of fiscal 2009, the Company performed an interim impairment review in advance of its annual impairment assessment because the Company believed events had occurred and circumstances had changed that would more likely than not reduce the fair value of the Companys goodwill and indefinite-lived intangible assets below their carrying amounts. These events included: (a) the decline of the price of the
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Companys Class A common stock, par value $0.01 per share (Class A Common Stock), and Class B common stock, par value $0.01 per share (Class B Common Stock), below the carrying value of the Companys stockholders equity; (b) the reduced growth in advertising revenues; (c) the decline in the operating profit margins in some of the Companys advertising-based businesses; and (d) the decline in the valuations of other television stations, newspapers and advertising-based companies as determined by the current trading values of those companies.
As a result of the interim impairment review performed, the Company recorded non-cash impairment charges of approximately $8.4 billion ($6.7 billion, net of tax) in the three and six months ended December 31, 2008. The charges consisted of a write-down of the Companys indefinite-lived intangible assets (primarily Federal Communications Commission licenses in the Television segment) of $4.6 billion, a write-down of $3.6 billion of goodwill and a write-down of the Newspapers and Information Services segments fixed assets of $185 million in accordance with ASC 360 Property, Plant and Equipment.
Note 9Borrowings
On August 25, 2009, News America Incorporated (NAI), a 100% owned subsidiary of the Company as defined in Rule 3-10(h) of Regulation S-X, entered into an indenture with the Company, as Guarantor, and The Bank of New York Mellon, as Trustee (the Indenture). The following notes were issued pursuant to the Indenture:
Notes due 2020 and 2039
In August 2009, NAI issued $400 million of 5.65% Senior Notes due 2020 and $600 million of 6.90% Senior Notes due 2039. The net proceeds received of approximately $989 million will be used for general corporate purposes.
Other
The Companys $250 million 6.75% Senior Debentures due January 2038 were puttable, at the option of the holder, to the Company in January 2010. The majority of these debentures were not put to the Company in January 2010 and the outstanding debentures which had been classified as current borrowings as of June 30, 2009 were reclassified as non-current borrowings as of December 31, 2009.
NAIs 0.75% Senior Exchangeable BUCS (BUCS) in the amount of $1,641 million are classified as current borrowings. The holders of the BUCS have the right to tender the BUCS for redemption on March 15, 2010 for payment of the adjusted liquidation preference of the BUCS plus accrued and unpaid distributions and any final period distribution in, at the Companys election, cash, ordinary shares of BSkyB, Class A Common Stock or any combination thereof. The Company may redeem the BUCS for cash, ordinary shares of BSkyB or a combination thereof in whole or in part, at any time on or after March 20, 2010, at the adjusted liquidation preference of the BUCS plus any accrued and unpaid distributions and any final period distribution thereon. On February 1, 2010, the Company announced that NAI gave notice to holders of the BUCS that any BUCS tendered at the option of the holders on the March 15, 2010 holder redemption date would be redeemed for cash at the specified redemption amount equal to $1,013.48 per BUCS, which represents the amount equal to the adjusted liquidation preference of such BUCS plus an amount equal to any accrued and unpaid distributions and any final period distribution.
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Note 10Equity
Dividends
The Company declared a dividend of $0.06 per share on both the Class A Common Stock and the Class B Common Stock in the three months ended September 30, 2009, which was paid in October 2009 to stockholders of record on September 9, 2009. The total aggregate dividend paid to stockholders in October 2009 was approximately $157 million.
Note 11Equity-Based Compensation
The following table summarizes the Companys equity-based compensation transactions:
For the three months ended December 31, |
For the six months ended December 31, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
(in millions) | ||||||||||||
Equity-based compensation |
$ | 35 | $ | 33 | $ | 80 | $ | 82 | ||||
Cash received from exercise of equity-based compensation |
$ | | $ | | $ | 21 | $ | 3 | ||||
At December 31, 2009, the Companys total compensation cost related to non-vested stock options, restricted stock units (RSUs) and stock appreciation rights not yet recognized for all equity-based compensation plans was approximately $204 million, the majority of which is expected to be recognized over the next three fiscal years. Compensation expense on all equity-based awards is generally recognized on a straight-line basis over the vesting period of the entire award.
Stock options exercised during the six months ended December 31, 2009 and 2008 resulted in the Companys issuance of approximately 1.8 million and 0.2 million shares of Class A Common Stock, respectively. The intrinsic value of the stock options exercised during the three and six months ended December 31, 2009 and 2008 were not material.
During the six months ended December 31, 2009, the Company issued 5.6 million RSUs. These RSUs will be settled in shares of Class A Common Stock upon vesting, except for approximately 0.9 million RSUs that will be settled in cash. RSUs granted to executive directors and certain awards granted to employees in certain foreign locations are settled in cash. At December 31, 2009 and June 30, 2009, the liability for cash-settled RSUs was $39 million and $52 million, respectively.
During the six months ended December 31, 2009 and 2008, approximately 9.2 million and 8.3 million RSUs vested, respectively, of which approximately 7.0 million and 6.7 million, respectively, were settled in Class A Common Stock, before statutory tax withholdings. The fair value of RSUs settled in Class A Common Stock was $76 million and $91 million for the six months ended December 31, 2009 and 2008, respectively. The remaining 2.2 million and 1.6 million RSUs settled during the six months ended December 31, 2009 and 2008, respectively, were settled in cash, before statutory tax withholdings, of approximately $23 million in each period.
The Company recognized a tax expense on vested RSUs and stock options exercised of $9 million and $5 million for the six months ended December 31, 2009 and 2008, respectively.
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Note 12Commitments and Guarantees
Commitments
During the six months ended December 31, 2009, the Company renewed its rights to broadcast Italys National League Football matches through fiscal 2012. The Company expects to pay approximately $1.7 billion over the term of the agreement.
During the second quarter of fiscal 2010, the Company entered into a long-term supply contract pursuant to which the Company will purchase ink for its newspaper printing facilities in the United Kingdom from a third party through fiscal 2022. The Company will pay approximately $400 million over the term of the contract.
On January 30, 2010, the Company announced that its News America Marketing unit had settled its litigation with Valassis Communications, Inc. (Valassis) for $500 million. The Company expects to pay this amount in fiscal 2010.
Other than as previously disclosed in these notes to the Companys unaudited consolidated financial statements, the Companys commitments have not changed significantly from disclosures included in the 2009 Form 10-K.
Guarantees
The Companys guarantees have not changed significantly from disclosures included in the 2009 Form 10-K.
Note 13 Contingencies
Intermix
On August 26, 2005 and August 30, 2005, two purported class action lawsuits captioned, respectively, Ron Sheppard v. Richard Rosenblatt et. al., and John Friedmann v. Intermix Media, Inc. et al., were filed in the California Superior Court, County of Los Angeles. Both lawsuits named as defendants all of the then incumbent members of the Intermix Board, including Mr. Rosenblatt, Intermixs former Chief Executive Officer, and certain entities affiliated with VantagePoint Venture Partners (VantagePoint), a former major Intermix stockholder. The complaints alleged that, in pursuing the transaction whereby Intermix was to be acquired by Fox Interactive Media, a subsidiary of the Company (the FIM Transaction) and approving the related merger agreement, the director defendants breached their fiduciary duties to Intermix stockholders by, among other things, engaging in self-dealing and failing to obtain the highest price reasonably available for Intermix and its stockholders. The complaints further alleged that the merger agreement resulted from a flawed process and that the defendants tailored the terms of the merger to advance their own interests. The FIM Transaction was consummated on September 30, 2005. The Friedmann and Sheppard lawsuits were subsequently consolidated and, on January 17, 2006, a consolidated amended complaint was filed (the Intermix Media Shareholder Litigation). The plaintiffs in the consolidated action sought various forms of declaratory relief, damages, disgorgement and fees and costs. On March 20, 2006, the court ordered that substantially identical claims asserted in a separate state action filed by Brad Greenspan, captioned Greenspan v. Intermix Media, Inc., et al. , be severed and related to the Intermix Media Shareholder Litigation. The defendants filed demurrers seeking dismissal of all claims in the Intermix Media Shareholder Litigation and the severed Greenspan claims. On October 6, 2006, the court sustained the demurrers without leave to amend. On December 13, 2006, the court dismissed the complaints and entered judgment for the defendants. Greenspan and plaintiffs in the Intermix Media Shareholder Litigation filed notices of appeal. The Court of Appeal heard arguments on the fully briefed appeal on October 23, 2008. On November 11, 2008, the Court of Appeal issued an unpublished opinion
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affirming the lower courts dismissal on all counts. On December 19, 2008, shareholder appellants filed a Petition for Review with the California Supreme Court. After the lower court sustained the demurrers in the Intermix Media Shareholder Litigation, co-counsel for certain of the plaintiffs moved for an award of attorneys fees and costs under a common law substantial benefit theory. On October 4, 2007, the court granted the motion and denied defendants application to tax costs. After defendants filed a notice of appeal, the matter was resolved.
In November 2005, plaintiff in a derivative action captioned LeBoyer v. Greenspan et al. pending against various former Intermix directors and officers in the United States District Court for the Central District of California filed a First Amended Class and Derivative Complaint (the Amended Complaint). The original derivative action was filed in May 2003 and arose out of Intermixs restatement of quarterly financial results for its fiscal year ended March 31, 2003. A substantially similar derivative action filed in Los Angeles Superior Court was dismissed based on the inability of the plaintiffs to plead adequately demand futility. Plaintiff LeBoyers November 2005 Amended Complaint added various allegations and purported class claims arising out of the FIM Transaction that are substantially similar to those asserted in the Intermix Media Shareholder Litigation. The Amended Complaint also added as defendants the individuals and entities named in the Intermix Media Shareholder Litigation that were not already defendants in the matter. On October 16, 2006, the court dismissed the fourth through seventh claims for relief, which related to the 2003 restatement, finding that the plaintiff is precluded from relitigating demand futility. At the same time, the court asked for further briefing regarding plaintiffs standing to assert derivative claims based on the FIM Transaction, including for alleged violation of Section 14(a) of the Exchange Act, the effect of the state judges dismissal of the claims in the Greenspan case and the Intermix Media Shareholder Litigation on the remaining direct class action claims alleging breaches of fiduciary duty and other common law claims leading up to the FIM Transaction. The parties filed the requested additional briefing in which the defendants requested that the court stay the direct LeBoyer claims pending the resolution of any appeal in the Greenspan case and the Intermix Media Shareholder Litigation. By order dated May 22, 2007, the court granted defendants motion to dismiss the derivative claims arising out of the FIM Transaction, and denied the defendants request to stay the two remaining direct claims. As explained in more detail in the next paragraph, the court subsequently consolidated this case with the Brown v. Brewer action also pending before the court. On July 11, 2007, plaintiffs filed the consolidated first amended complaint under the Brown case title. See the discussion of the Brown case below for the subsequent developments in the consolidated case.
On June 14, 2006, a purported class action lawsuit, captioned Jim Brown v. Brett C. Brewer, et al., was filed against certain former Intermix directors and officers in the United States District Court for the Central District of California. The plaintiff asserted claims for alleged violations of Section 14a of the Exchange Act and SEC Rule 14a-9, as well as control person liability under Section 20a. The plaintiff alleged that certain defendants disseminated false and misleading definitive proxy statements on two occasions: one on December 30, 2003 in connection with the shareholder vote on January 29, 2004 on the election of directors and ratification of financing transactions with certain entities of VantagePoint; and another on August 25, 2005 in connection with the shareholder vote on the FIM Transaction. The complaint named as defendants certain VantagePoint related entities, the former general counsel and the members of the Intermix Board who were incumbent on the dates of the respective proxy statements. Intermix was not named as a defendant, but has certain indemnity obligations to the former officer and director defendants in connection with these claims and allegations. On August 25, 2006, plaintiff amended his complaint to add certain investment banks (the Investment Banks) as defendants. Intermix has certain indemnity obligations to the Investment Banks as well. Plaintiff amended his complaint again on September 27, 2006, which defendants moved to dismiss. On February 9, 2007, the case was transferred to Judge George H. King, the judge assigned to the LeBoyer action, on the grounds that it raises substantially related questions of law and fact as LeBoyer, and would entail substantial duplication of labor if heard by
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different judges. On June 11, 2007, Judge King ordered the Brown case be consolidated with the LeBoyer action, ordered plaintiffs counsel to file a consolidated first amended complaint, and further ordered the parties to file a joint brief on defendants contemplated motion to dismiss the consolidated first amended complaint. On July 11, 2007, plaintiffs filed the consolidated first amended complaint, which defendants moved to dismiss. By order dated January 17, 2008, Judge King granted defendants motion to dismiss the 2003 proxy claims (concerning VantagePoint transactions) and the 2005 proxy claims (concerning the FIM Transaction), as well as a claim against the VantagePoint entities alleging unjust enrichment. The court found it unnecessary to rule on dismissal of the remaining claims, which are related to the 2005 FIM Transaction, because the dismissal disposed of those claims. On February 8, 2008, plaintiffs filed a consolidated second amended complaint, which defendants moved to dismiss on February 28, 2008. By order dated July 15, 2008, the court granted in part and denied in part defendants motion to dismiss. The 2003 claims and the claims against the Investment Banks were dismissed with prejudice. The Section 14a, Section 20a and the breach of fiduciary duty claims related to the FIM Transaction remain against the officer and director defendants and the VantagePoint defendants. On October 6, 2008, defendants filed a partial motion for summary judgment seeking dismissal of the Section 14a, Section 20 and state law disclosure claims. On November 10, 2008, Judge King denied the motion without prejudice. On November 14, 2008, plaintiff filed a motion for class certification to which defendants filed their opposition on January 14, 2009. On June 22, 2009, the court granted plaintiffs motion for class certification, certifying a class of all holders of Intermix Media, Inc. common stock, from July 18, 2005 through consummation of the FIM Transaction, who were allegedly harmed by defendants improper conduct as set forth in the complaint. The parties have completed fact and expert discovery. Defendants motion for summary judgment was filed on October 19, 2009. Defendants also filed a motion to exclude plaintiffs damages expert on November 30, 2009. The court has taken both motions under submission. No trial date has been set yet.
News America Marketing
On January 18, 2006, Valassis filed a complaint against News America Incorporated, News America Marketing FSI, LLC and News America Marketing Services, In-Store, LLC, each of which are subsidiaries of the Company (collectively News America), in the United States District Court for the Eastern District of Michigan. Valassis alleges that News America possesses monopoly power in a claimed in-store advertising and promotions market (the in-store market) and has used that power to gain an unfair advantage over Valassis in a purported market for coupons distributed by free-standing inserts (FSIs). Valassis alleges that News America is attempting to monopolize the purported FSI market by leveraging its alleged monopoly power in the purported in-store market, thereby allegedly violating Section 2 of the Sherman Antitrust Act of 1890, as amended (the Sherman Act). Valassis further alleges that News America has unlawfully bundled the sale of in-store marketing products with the sale of FSIs and that such bundling constitutes unlawful tying in violation of Sections 1 and 3 of the Sherman Act. Additionally, Valassis alleges that News America is predatorily pricing its FSI products in violation of Section 2 of the Sherman Act. Valassis also asserts that News America violated various state antitrust statutes and has tortuously interfered with Valassis actual or expected business relationships. Valassis complaint seeks injunctive relief, damages, fees and costs. On April 20, 2006, News America moved to dismiss Valassis complaint in its entirety for failure to state a cause of action. On September 28, 2006, the Magistrate Judge issued a Report and Recommendation granting the motion. On October 16, 2006, Valassis filed an amended complaint, alleging the same causes of action. On November 17, 2006, News America answered the three federal antitrust claims and moved to dismiss the remaining nine state law claims. On March 23, 2007, the court granted News Americas motion and dismissed the nine state law claims. The parties engaged in discovery, which was combined with the California and Michigan state cases discussed below, and is now completed. The parties have exchanged expert reports. On September 3, 2009, the court denied the parties cross- motions for summary judgment. Trial was set to commence on February 2, 2010.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On March 9, 2007, Valassis filed a two-count complaint in Michigan state court against News America. That complaint, which was based on the same factual allegations as the federal complaint discussed above and the California state court complaint discussed below, alleged that News America tortuously interfered with Valassis business relationships and that News America unfairly competed with Valassis. The complaint sought injunctive relief, damages, fees and costs. On May 4, 2007, News America filed a motion to dismiss or, in the alternative stay, that complaint. On August 14, 2007, the court denied the motion. On July 7, 2008, Valassis filed an amended complaint alleging the same causes of action, based on essentially the same factual allegations and seeking the same relief. News America moved to dismiss the amended complaint and on October 10, 2008, the court denied the motion. The parties completed discovery, which was combined with the federal case discussed above and the California state case discussed below. The court denied News Americas motion for summary judgment in January 2009. Trial commenced on May 27, 2009. On July 23, 2009, a jury in the Michigan state court returned a verdict in the amount of $300 million for Valassis. News America filed a motion for new trial, which was denied. News America filed an appeal and posted a bond for $25 million, the maximum bond required under Michigan law.
On March 12, 2007, Valassis filed a three-count complaint in California state court against News America. That complaint, which is based on the same factual allegations as the federal and Michigan state court complaints discussed above, alleges that News America has violated the Cartwright Act (Californias state antitrust law) by unlawfully tying its FSI products to its in-store products, has violated Californias Unfair Practices Act by predatorily pricing its FSI products, and has unfairly competed with Valassis. Valassis California complaint seeks injunctive relief, damages, fees and costs. On May 4, 2007, News America filed a motion to dismiss or, in the alternative stay, that complaint. On June 28, 2007, the court issued a tentative ruling denying the motion and reassigned the case to the Complex Litigation Program. On July 19, 2007, the court denied the motion. The California state court case was stayed until March 2010.
As a result of pretrial proceedings and negotiations that occurred in late January related to the complaint filed against News America in the United States District Court for the Eastern District of Michigan, on January 30, 2010, the Company announced that News America had reached a settlement agreement with Valassis pursuant to which all claims filed by Valassis in all matters listed above will be dismissed with prejudice. The United States District Court for the Eastern District of Michigan oversaw the settlement discussions and approved the terms of the settlement. As part of the settlement, News America will pay Valassis $500 million and enter into a ten-year shared mail distribution agreement with Valassis Direct Mail, a Valassis subsidiary. Additionally, the parties will also agree to mutual business practices that will require the parties to adhere to certain antitrust laws. In connection with the settlement, the judgment in the Michigan state court case from July 2009 will be satisfied with all related appeals dismissed. In addition, the California state court case will be dismissed with prejudice.
As a result of the settlement the Company has recorded a charge of $500 million in the three and six months ended December 31, 2009. The cost of the new distribution agreement, which will be entered into on a fair value basis, will be accounted for prospectively, consistent with the accounting for other similar agreements.
Other
Other than as previously disclosed in the notes to the Companys unaudited consolidated financial statements, the Company is party to several purchase and sale arrangements which become exercisable over the next ten years by the Company or the counter-party to the agreement. In the next twelve months, none of these arrangements that become exercisable are material to the Company.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company experiences routine litigation in the normal course of its business. On January 30, 2010, the Company announced that its News America Marketing unit had settled its previously reported litigation with Valassis for $500 million. The Company believes that none of its other pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
The Companys operations are subject to tax in various domestic and international jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
Note 14Pension and Other Postretirement Benefits
The Company sponsors non-contributory pension plans and retiree health and life insurance benefit plans covering specific groups of employees. As of January 1, 2008, the Companys major pension plans are closed to new participants (with the exception of groups covered by collective bargaining agreements). The benefits payable for the Companys non-contributory pension plans are based primarily on a formula factoring both an employees years of service and pay near retirement. Participant employees are vested in the pension plans after five years of service. The Companys policy for all pension plans is to fund amounts, at a minimum, in accordance with statutory requirements. Plan assets consist principally of common stocks, marketable bonds and government securities. The retiree health and life insurance benefit plans offer medical and/or life insurance to certain full-time employees and eligible dependents that retire after fulfilling age and service requirements.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The components of net periodic benefit costs were as follows:
Pension Benefits | Postretirement Benefits | |||||||||||||||
For the three months ended December 31, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost benefits earned during the period |
$ | 18 | $ | 18 | $ | 1 | $ | 2 | ||||||||
Interest costs on projected benefit obligation |
43 | 41 | 5 | 5 | ||||||||||||
Expected return on plan assets |
(35 | ) | (38 | ) | | | ||||||||||
Amortization of deferred losses |
10 | 4 | | | ||||||||||||
Other |
2 | 1 | (4 | ) | (1 | ) | ||||||||||
Net periodic costs |
$ | 38 | $ | 26 | $ | 2 | $ | 6 | ||||||||
Cash contributions |
$ | 9 | $ | 13 | $ | 4 | $ | 4 | ||||||||
For the six months ended December 31, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Service cost benefits earned during the period |
$ | 36 | $ | 38 | $ | 2 | $ | 4 | ||||||||
Interest costs on projected benefit obligation |
86 | 84 | 10 | 10 | ||||||||||||
Expected return on plan assets |
(70 | ) | (77 | ) | | | ||||||||||
Amortization of deferred losses |
20 | 8 | | | ||||||||||||
Other |
3 | 1 | (8 | ) | (5 | ) | ||||||||||
Net periodic costs |
$ | 75 | $ | 54 | $ | 4 | $ | 9 | ||||||||
Cash contributions |
$ | 23 | $ | 32 | $ | 8 | $ | 8 | ||||||||
Note 15Segment Information
The Company is a diversified global media company, which manages and reports its businesses in eight segments. During the first quarter of fiscal 2010, the Company reclassified STAR, which develops, produces and distributes television programming in Asia, from the Television segment to the Cable Network Programming segment. This reclassification was the result of a restructuring to combine the sales and distribution operations of the STAR channels with those of the Companys other international cable businesses. In addition, the Magazines and Inserts segment has been renamed the Integrated Marketing Services segment. The Company has revised its segment information for prior fiscal years to conform to the fiscal 2010 presentation. Beginning in fiscal 2010, the Companys eight segments are:
| Filmed Entertainment, which principally consists of the production and acquisition of live-action and animated motion pictures for distribution and licensing in all formats in all entertainment media worldwide, and the production and licensing of television programming worldwide. |
| Television, which principally consists of the broadcasting of network programming in the United States and the operation of 27 full power broadcast television stations, including nine duopolies, in the United States (of these stations, 17 are affiliated with the FOX network and ten are affiliated with the MyNetworkTV network). |
| Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems and direct broadcast satellite operators primarily in the United States, Latin America, Europe and Asia. |
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
| Direct Broadcast Satellite Television, which consists of the distribution of basic and premium programming services via satellite and broadband directly to subscribers in Italy. |
| Integrated Marketing Services, which principally consists of the publication of free-standing inserts, which are promotional booklets containing consumer offers distributed through insertion in local Sunday newspapers in the United States, and the provision of in-store marketing products and services, primarily to consumer packaged goods manufacturers in the United States and Canada. |
| Newspapers and Information Services, which principally consists of the publication of four national newspapers in the United Kingdom, the publication of approximately 146 newspapers in Australia, the publication of a metropolitan newspaper and a national newspaper (with international editions) in the United States and the provision of information services. |
| Book Publishing, which principally consists of the publication of English language books throughout the world. |
| Other, which principally consists of the Companys digital media properties and News Outdoor, an advertising business which offers display advertising in outdoor locations primarily throughout Russia and Eastern Europe. |
The Companys operating segments have been determined in accordance with the Companys internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measures are segment operating income (loss) and segment operating income (loss) before depreciation and amortization.
Segment operating income (loss) does not include: Impairment and restructuring charges, equity earnings (losses) of affiliates, interest expense, net, interest income, other, net, income tax expense and net income attributable to noncontrolling interests. The Company believes that information about segment operating income (loss) assists all users of the Companys consolidated financial statements by allowing them to evaluate changes in the operating results of the Companys portfolio of businesses separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results.
Segment operating income (loss) before depreciation and amortization is defined as segment operating income (loss) plus depreciation and amortization and the amortization of cable distribution investments and eliminates the variable effect across all business segments of depreciation and amortization. Depreciation and amortization expense includes the depreciation of property and equipment, as well as amortization of finite-lived intangible assets. Amortization of cable distribution investments represents a reduction against revenues over the term of a carriage arrangement and, as such, it is excluded from segment operating income (loss) before depreciation and amortization.
Total segment operating income and segment operating income (loss) before depreciation and amortization are non-GAAP measures and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, these measures do not reflect cash available to fund requirements. These measures exclude items, such as impairment and restructuring charges, which are significant components in assessing the Companys financial performance. Segment operating income (loss) before depreciation and amortization also excludes depreciation and amortization which are also significant components in assessing the Companys financial performance.
Management believes that total segment operating income and segment operating income (loss) before depreciation and amortization are appropriate measures for evaluating the operating performance of the
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Companys business. Total segment operating income and segment operating income (loss) before depreciation and amortization provide management, investors and equity analysts measures to analyze operating performance of the Companys business and its enterprise value against historical data and competitors data, although historical results, including total segment operating income and segment operating income (loss) before depreciation and amortization, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) |
||||||||||||||||
Revenues: |
||||||||||||||||
Filmed Entertainment |
$ | 1,898 | $ | 1,485 | $ | 3,419 | $ | 2,744 | ||||||||
Television |
1,248 | 1,135 | 2,013 | 1,964 | ||||||||||||
Cable Network Programming |
1,756 | 1,492 | 3,362 | 2,946 | ||||||||||||
Direct Broadcast Satellite Television |
1,008 | 922 | 1,935 | 1,891 | ||||||||||||
Integrated Marketing Services |
291 | 284 | 558 | 543 | ||||||||||||
Newspapers and Information Services |
1,655 | 1,505 | 3,058 | 3,210 | ||||||||||||
Book Publishing |
381 | 305 | 691 | 620 | ||||||||||||
Other |
447 | 743 | 847 | 1,462 | ||||||||||||
Total revenues |
$ | 8,684 | $ | 7,871 | $ | 15,883 | $ | 15,380 | ||||||||
Segment operating income (loss): |
||||||||||||||||
Filmed Entertainment |
$ | 324 | $ | 112 | $ | 715 | $ | 363 | ||||||||
Television |
29 | (2 | ) | 67 | 82 | |||||||||||
Cable Network Programming |
604 | 448 | 1,117 | 798 | ||||||||||||
Direct Broadcast Satellite Television |
(30 | ) | 10 | 98 | 175 | |||||||||||
Integrated Marketing Services |
(414 | ) | 86 | (341 | ) | 154 | ||||||||||
Newspapers and Information Services |
259 | 200 | 284 | 341 | ||||||||||||
Book Publishing |
65 | 23 | 85 | 26 | ||||||||||||
Other |
(125 | ) | (38 | ) | (251 | ) | (139 | ) | ||||||||
Total segment operating income |
712 | 839 | 1,774 | 1,800 | ||||||||||||
Impairment and restructuring charges |
(10 | ) | (8,465 | ) | (30 | ) | (8,473 | ) | ||||||||
Equity earnings (losses) of affiliates |
58 | 30 | 90 | (329 | ) | |||||||||||
Interest expense, net |
(269 | ) | (231 | ) | (514 | ) | (452 | ) | ||||||||
Interest income |
16 | 20 | 41 | 60 | ||||||||||||
Other, net |
(86 | ) | (98 | ) | (98 | ) | 206 | |||||||||
Income (loss) before income tax expense |
421 | (7,905 | ) | 1,263 | (7,188 | ) | ||||||||||
Income tax (expense) benefit |
(137 | ) | 1,514 | (382 | ) | 1,333 | ||||||||||
Net income (loss) |
284 | (6,391 | ) | 881 | (5,855 | ) | ||||||||||
Less: Net income attributable to noncontrolling interests |
(30 | ) | (26 | ) | (56 | ) | (47 | ) | ||||||||
Net income (loss) attributable to News Corporation stockholders |
$ | 254 | $ | (6,417 | ) | $ | 825 | $ | (5,902 | ) | ||||||
Intersegment revenues, generated primarily by the Filmed Entertainment segment, of approximately $249 million and $273 million for the three months ended December 31, 2009 and 2008, respectively, and of approximately $389 million and $443 million for the six months ended December 31, 2009 and 2008, respectively, have been eliminated within the Filmed Entertainment segment. Intersegment operating profit
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
generated primarily by the Filmed Entertainment segment of approximately $17 million and $32 million for the three months ended December 31, 2009 and 2008, respectively, and of approximately $12 and $34 million for the six months ended December 31, 2009 and 2008, respectively, have been eliminated within the Filmed Entertainment segment.
For the three months ended December 31, 2009 | ||||||||||||||
Segment operating income (loss) |
Depreciation and amortization |
Amortization of cable distribution investments |
Segment operating income (loss) before depreciation and amortization |
|||||||||||
(in millions) | ||||||||||||||
Filmed Entertainment |
$ | 324 | $ | 23 | $ | | $ | 347 | ||||||
Television |
29 | 20 | | 49 | ||||||||||
Cable Network Programming |
604 | 36 | 22 | 662 | ||||||||||
Direct Broadcast Satellite Television |
(30 | ) | 72 | | 42 | |||||||||
Integrated Marketing Services |
(414 | ) | 2 | | (412 | ) | ||||||||
Newspapers and Information Services |
259 | 90 | | 349 | ||||||||||
Book Publishing |
65 | 4 | | 69 | ||||||||||
Other |
(125 | ) | 52 | | (73 | ) | ||||||||
Total |
$ | 712 | $ | 299 | $ | 22 | $ | 1,033 | ||||||
For the three months ended December 31, 2008 | |||||||||||||
Segment operating income (loss) |
Depreciation and amortization |
Amortization of cable distribution investments |
Segment operating income before depreciation and amortization | ||||||||||
(in millions) | |||||||||||||
Filmed Entertainment |
$ | 112 | $ | 23 | $ | | $ | 135 | |||||
Television |
(2 | ) | 20 | | 18 | ||||||||
Cable Network Programming |
448 | 31 | 19 | 498 | |||||||||
Direct Broadcast Satellite Television |
10 | 56 | | 66 | |||||||||
Integrated Marketing Services |
86 | 3 | | 89 | |||||||||
Newspapers and Information Services |
200 | 76 | | 276 | |||||||||
Book Publishing |
23 | 2 | | 25 | |||||||||
Other |
(38 | ) | 72 | | 34 | ||||||||
Total |
$ | 839 | $ | 283 | $ | 19 | $ | 1,141 | |||||
For the six months ended December 31, 2009 | ||||||||||||||
Segment operating income (loss) |
Depreciation and amortization |
Amortization of cable distribution investments |
Segment operating income (loss) before depreciation and amortization |
|||||||||||
(in millions) | ||||||||||||||
Filmed Entertainment |
$ | 715 | $ | 46 | $ | | $ | 761 | ||||||
Television |
67 | 41 | | 108 | ||||||||||
Cable Network Programming |
1,117 | 78 | 45 | 1,240 | ||||||||||
Direct Broadcast Satellite Television |
98 | 138 | | 236 | ||||||||||
Integrated Marketing Services |
(341 | ) | 5 | | (336 | ) | ||||||||
Newspapers and Information Services |
284 | 177 | | 461 | ||||||||||
Book Publishing |
85 | 8 | | 93 | ||||||||||
Other |
(251 | ) | 103 | | (148 | ) | ||||||||
Total |
$ | 1,774 | $ | 596 | $ | 45 | $ | 2,415 | ||||||
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the six months ended December 31, 2008 | |||||||||||||
Segment operating income (loss) |
Depreciation and amortization |
Amortization of cable distribution investments |
Segment operating income before depreciation and amortization | ||||||||||
(in millions) | |||||||||||||
Filmed Entertainment |
$ | 363 | $ | 46 | $ | | $ | 409 | |||||
Television |
82 | 40 | | 122 | |||||||||
Cable Network Programming |
798 | 62 | 42 | 902 | |||||||||
Direct Broadcast Satellite Television |
175 | 116 | | 291 | |||||||||
Integrated Marketing Services |
154 | 5 | | 159 | |||||||||
Newspapers and Information Services |
341 | 166 | | 507 | |||||||||
Book Publishing |
26 | 4 | | 30 | |||||||||
Other |
(139 | ) | 140 | | 1 | ||||||||
Total |
$ | 1,800 | $ | 579 | $ | 42 | $ | 2,421 | |||||
At December 31, 2009 |
At June 30, 2009 | |||||
(in millions) | ||||||
Total assets: |
||||||
Filmed Entertainment |
$ | 7,662 | $ | 7,042 | ||
Television |
6,986 | 6,378 | ||||
Cable Network Programming |
11,820 | 11,688 | ||||
Direct Broadcast Satellite Television |
3,043 | 2,647 | ||||
Integrated Marketing Services |
1,364 | 1,346 | ||||
Newspapers and Information Services |
11,015 | 10,741 | ||||
Book Publishing |
1,654 | 1,582 | ||||
Other |
9,427 | 8,740 | ||||
Investments |
3,162 | 2,957 | ||||
Total assets |
$ | 56,133 | $ | 53,121 | ||
Goodwill and Intangible assets, net: |
||||||
Filmed Entertainment |
$ | 1,901 | $ | 1,917 | ||
Television |
4,310 | 4,310 | ||||
Cable Network Programming |
6,863 | 6,912 | ||||
Direct Broadcast Satellite Television |
629 | 617 | ||||
Integrated Marketing Services |
1,036 | 1,034 | ||||
Newspapers and Information Services |
6,222 | 6,050 | ||||
Book Publishing |
503 | 511 | ||||
Other |
1,894 | 1,956 | ||||
Total goodwill and intangible assets, net |
$ | 23,358 | $ | 23,307 | ||
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 16Additional Financial Information
Supplemental Cash Flows Information
For the six months ended December 31, |
||||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Supplemental cash flows information: |
||||||||
Cash paid for income taxes |
$ | (482 | ) | $ | (774 | ) | ||
Cash paid for interest |
(468 | ) | (439 | ) | ||||
Sale of other investments |
15 | 12 | ||||||
Purchase of other investments |
(79 | ) | (45 | ) | ||||
Supplemental information on businesses acquired: |
||||||||
Fair value of assets acquired |
22 | 228 | ||||||
Cash acquired |
3 | | ||||||
Liabilities assumed |
72 | 94 | ||||||
Noncontrolling interest (increase) decrease |
(1 | ) | 140 | |||||
Cash paid |
(96 | ) | (462 | ) | ||||
Fair value of stock consideration |
$ | | $ | | ||||
Other, net consisted of the following:
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) |
||||||||||||||||
Loss on the Photobucket transaction (a) |
$ | (29 | ) | $ | | $ | (29 | ) | $ | | ||||||
Gain on the sale of the Stations (a) |
| | | 232 | ||||||||||||
Loss on the sale of eastern European television stations (a) |
(19 | ) | (100 | ) | (19 | ) | (100 | ) | ||||||||
Change in fair value of exchangeable securities and other financial instruments (b) |
| 14 | (4 | ) | 76 | |||||||||||
Other |
(38 | ) | (12 | ) | (46 | ) | (2 | ) | ||||||||
Total Other, net |
$ | (86 | ) | $ | (98 | ) | $ | (98 | ) | $ | 206 | |||||
(a) | See Note 2Acquisitions, Disposals and Other Transactions |
(b) | The Company has certain outstanding exchangeable debt securities which contain embedded derivatives. Pursuant to ASC 815, these embedded derivatives require separate accounting and, as such, changes in their fair value are recognized in other, net. A significant variance in the price of underlying stock could have a material impact on the operating results of the Company. |
Note 17Subsequent Events
In preparation of its consolidated financial statements, the Company considered subsequent events through February 3, 2010, which was the date the Companys consolidated financial statements were issued.
In December 2009, the Company announced that it had entered into an agreement with Sky Deutschland to subscribe to up to 49 million in newly registered shares of Sky Deutschland pursuant to a capital increase. Sky Deutschland completed this capital increase in January 2010 and, accordingly, the Company purchased
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
49 million newly registered shares of Sky Deutschland at a price of 2.25 per new share for an aggregate cost of approximately $158 million. As a result, News Corporations stake in Sky Deutschland increased to approximately 45%.
In January 2010, the Company sold its 33% interest in STOXX, Ltd. (STOXX), a European market index provider, for approximately $300 million in cash and additional consideration of up to approximately $40 million conditioned upon STOXX achieving specific performance objectives.
On January 30, 2010, the Company announced that its News America Marketing unit had settled its litigation with Valassis for $500 million.
A dividend of $0.075 per share of Class A Common Stock and Class B Common Stock has been declared and is payable on April 14, 2010. The record date for determining dividend entitlements is March 10, 2010.
Note 18Supplemental Guarantor Information
In May 2007, NAI, a 100% owned subsidiary of the Company as defined in Rule 3-10(h) of Regulation S-X, entered into a credit agreement, among NAI as Borrower, the Company as Parent Guarantor, the initial lenders named therein (the Lenders), Citibank, N. A. as Administrative Agent and JPMorgan Chase Bank, N. A. as Syndication Agent (the Credit Agreement). The Credit Agreement provides a $2.25 billion unsecured revolving credit facility with a sub-limit of $600 million available for the issuance of letters of credit. NAI may request an increase in the amount of the credit facility up to a maximum amount of $2.5 billion. Borrowings are in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the agreement include the requirement that the Company maintain specific leverage ratios and limitations on secured indebtedness. The Company pays a facility fee of 0.08% regardless of facility usage. The Company pays interest for borrowings at LIBOR plus 0.27% and pays commission fees on letters of credit at 0.27%. The Company pays an additional fee of 0.05% if borrowings under the facility exceed 50% of the committed facility. The interest and fees are based on the Companys current debt rating. The maturity date is in May 2012; however, NAI may request that the Lenders commitments be renewed for up to two additional one year periods.
The Company, as Parent Guarantor, presently guarantees the senior public indebtedness of NAI and the guarantee is full and unconditional. The supplemental condensed consolidating financial information of the Parent Guarantor should be read in conjunction with these consolidated financial statements.
In accordance with rules and regulations of the SEC, the Company uses the equity method to account for the results of all of the non-guarantor subsidiaries, representing substantially all of the Companys consolidated results of operations, excluding certain intercompany eliminations.
The following condensed consolidating financial statements present the results of operations, financial position and cash flows of NAI, the Company and the subsidiaries of the Company and the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Statement of Operations
For the three months ended December 31, 2009
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries |
||||||||||||||||
Revenues |
$ | | $ | | $ | 8,684 | $ | | $ | 8,684 | ||||||||||
Expenses |
(63 | ) | | (7,919 | ) | | (7,982 | ) | ||||||||||||
Equity earnings of affiliates |
1 | | 57 | | 58 | |||||||||||||||
Interest expense, net |
(776 | ) | (297 | ) | 373 | 431 | (269 | ) | ||||||||||||
Interest income |
1 | | 851 | (836 | ) | 16 | ||||||||||||||
Earnings (losses) from subsidiary entities |
411 | 551 | | (962 | ) | | ||||||||||||||
Other, net |
(1 | ) | | (85 | ) | | (86 | ) | ||||||||||||
Income (loss) before income tax expense |
(427 | ) | 254 | 1,961 | (1,367 | ) | 421 | |||||||||||||
Income tax (expense) benefit |
129 | | (612 | ) | 346 | (137 | ) | |||||||||||||
Net income (loss) |
(298 | ) | 254 | 1,349 | (1,021 | ) | 284 | |||||||||||||
Less: Net income attributable to noncontrolling interests |
| | (30 | ) | | (30 | ) | |||||||||||||
Net income (loss) attributable to News Corporation stockholders |
$ | (298 | ) | $ | 254 | $ | 1,319 | $ | (1,021 | ) | $ | 254 | ||||||||
See notes to supplemental guarantor information
31
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Statement of Operations
For the three months ended December 31, 2008
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries |
||||||||||||||||
Revenues |
$ | 1 | $ | | $ | 7,870 | $ | | $ | 7,871 | ||||||||||
Expenses |
(82 | ) | | (15,415 | ) | | (15,497 | ) | ||||||||||||
Equity earnings of affiliates |
1 | | 29 | | 30 | |||||||||||||||
Interest expense, net |
(400 | ) | (268 | ) | (143 | ) | 580 | (231 | ) | |||||||||||
Interest income |
187 | | 413 | (580 | ) | 20 | ||||||||||||||
Earnings (losses) from subsidiary entities |
321 | (6,114 | ) | | 5,793 | | ||||||||||||||
Other, net |
(124 | ) | (35 | ) | 61 | | (98 | ) | ||||||||||||
(Loss) income before income tax expense |
(96 | ) | (6,417 | ) | (7,185 | ) | 5,793 | (7,905 | ) | |||||||||||
Income tax benefit |
25 | | 1,422 | 67 | 1,514 | |||||||||||||||
Net (loss) income |
(71 | ) | (6,417 | ) | (5,763 | ) | 5,860 | (6,391 | ) | |||||||||||
Less: Net income attributable to noncontrolling interests |
| | (26 | ) | | (26 | ) | |||||||||||||
Net (loss) income attributable to News Corporation stockholders |
$ | (71 | ) | $ | (6,417 | ) | $ | (5,789 | ) | $ | 5,860 | $ | (6,417 | ) | ||||||
See notes to supplemental guarantor information
32
Table of Contents
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Statement of Operations
For the six months ended December 31, 2009
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries |
||||||||||||||||
Revenues |
$ | | $ | | $ | 15,883 | $ | | $ | 15,883 | ||||||||||
Expenses |
(125 | ) | | (14,014 | ) | | (14,139 | ) | ||||||||||||
Equity earnings of affiliates |
2 | | 88 | | 90 | |||||||||||||||
Interest expense, net |
(1,516 | ) | (587 | ) | (8 | ) | 1,597 | (514 | ) | |||||||||||
Interest income |
2 | | 1,636 | (1,597 | ) | 41 | ||||||||||||||
Earnings (losses) from subsidiary entities |
884 | 1,412 | | (2,296 | ) | | ||||||||||||||
Other, net |
384 | | (77 | ) | (405 | ) | (98 | ) | ||||||||||||
Income (loss) before income tax expense |
(369 | ) | 825 | 3,508 | (2,701 | ) | 1,263 | |||||||||||||
Income tax (expense) benefit |
112 | | (1,062 | ) | 568 | (382 | ) | |||||||||||||
Net income (loss) |
(257 | ) | 825 | 2,446 | (2,133 | ) | 881 | |||||||||||||
Less: Net income attributable to noncontrolling interests |
| | (56 | ) | | (56 | ) | |||||||||||||
Net income (loss) attributable to News Corporation stockholders |
$ | (257 | ) | $ | 825 | $ | 2,390 | $ | (2,133 | ) | $ | 825 | ||||||||
See notes to supplemental guarantor information
33
Table of Contents
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Statement of Operations
For the six months ended December 31, 2008
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries |
||||||||||||||||
Revenues |
$ | 3 | $ | | $ | 15,377 | $ | | $ | 15,380 | ||||||||||
Expenses |
(170 | ) | | (21,883 | ) | | (22,053 | ) | ||||||||||||
Equity earnings (losses) of affiliates |
2 | | (331 | ) | | (329 | ) | |||||||||||||
Interest expense, net |
(740 | ) | (531 | ) | (143 | ) | 962 | (452 | ) | |||||||||||
Interest income |
203 | | 819 | (962 | ) | 60 | ||||||||||||||
Earnings (losses) from subsidiary entities |
755 | (5,300 | ) | | 4,545 | | ||||||||||||||
Other, net |
(43 | ) | (71 | ) | 320 | | 206 | |||||||||||||
(Loss) income before income tax expense |
10 | (5,902 | ) | (5,841 | ) | 4,545 | (7,188 | ) | ||||||||||||
Income tax benefit (expense) |
(2 | ) | | 1,083 | 252 | 1,333 | ||||||||||||||
Net (loss) income |
8 | (5,902 | ) | (4,758 | ) | 4,797 | (5,855 | ) | ||||||||||||
Less: Net income attributable to noncontrolling interests |
| | (47 | ) | | (47 | ) | |||||||||||||
Net (loss) income attributable to News Corporation stockholders |
$ | 8 | $ | (5,902 | ) | $ | (4,805 | ) | $ | 4,797 | $ | (5,902 | ) | |||||||
See notes to supplemental guarantor information
34
Table of Contents
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Balance Sheet
At December 31, 2009
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries | |||||||||||||
ASSETS: |
|||||||||||||||||
Current assets: |
|||||||||||||||||
Cash and cash equivalents |
$ | 5,066 | $ | | $ | 2,200 | $ | | $ | 7,266 | |||||||
Receivables, net |
21 | | 7,495 | | 7,516 | ||||||||||||
Inventories, net |
| | 2,995 | | 2,995 | ||||||||||||
Other |
56 | | 502 | | 558 | ||||||||||||
Total current assets |
5,143 | | 13,192 | | 18,335 | ||||||||||||
Non-current assets: |
|||||||||||||||||
Receivables |
| | 235 | | 235 | ||||||||||||
Inventories, net |
| | 3,506 | | 3,506 | ||||||||||||
Property, plant and equipment, net |
62 | | 6,158 | | 6,220 | ||||||||||||
Intangible assets, net |
| | 8,893 | | 8,893 | ||||||||||||
Goodwill |
| | 14,465 | | 14,465 | ||||||||||||
Other |
257 | | 1,060 | | 1,317 | ||||||||||||
Investments |
|||||||||||||||||
Investments in associated companies and other investments |
91 | 39 | 3,032 | | 3,162 | ||||||||||||
Intragroup investments |
47,774 | 39,423 | | (87,197 | ) | | |||||||||||
Total investments |
47,865 | 39,462 | 3,032 | (87,197 | ) | 3,162 | |||||||||||
TOTAL ASSETS |
$ | 53,327 | $ | 39,462 | $ | 50,541 | $ | (87,197 | ) | $ | 56,133 | ||||||
LIABILITIES AND EQUITY |
|||||||||||||||||
Current liabilities: |
|||||||||||||||||
Borrowings |
$ | 1,793 | $ | | $ | 47 | $ | | $ | 1,840 | |||||||
Other current liabilities |
32 | | 9,321 | | 9,353 | ||||||||||||
Total current liabilities |
1,825 | | 9,368 | | 11,193 | ||||||||||||
Non-current liabilities: |
|||||||||||||||||
Borrowings |
13,371 | | 64 | | 13,435 | ||||||||||||
Other non-current liabilities |
216 | | 6,094 | | 6,310 | ||||||||||||
Intercompany |
23,172 | 15,061 | (38,233 | ) | | | |||||||||||
Redeemable noncontrolling interests |
| | 365 | | 365 | ||||||||||||
Equity |
14,743 | 24,401 | 72,883 | (87,197 | ) | 24,830 | |||||||||||
TOTAL LIABILITIES AND EQUITY |
$ | 53,327 | $ | 39,462 | $ | 50,541 | $ | (87,197 | ) | $ | 56,133 | ||||||
See notes to supplemental guarantor information
35
Table of Contents
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Balance Sheet
At June 30, 2009
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries | |||||||||||||
ASSETS: |
|||||||||||||||||
Current Assets: |
|||||||||||||||||
Cash and cash equivalents |
$ | 4,479 | $ | | $ | 2,061 | $ | | $ | 6,540 | |||||||
Receivables, net |
15 | | 6,272 | | 6,287 | ||||||||||||
Inventories, net |
| | 2,477 | | 2,477 | ||||||||||||
Other |
40 | | 492 | | 532 | ||||||||||||
Total current assets |
4,534 | | 11,302 | | 15,836 | ||||||||||||
Non-current assets: |
|||||||||||||||||
Receivables |
| | 282 | | 282 | ||||||||||||
Inventories, net |
| | 3,178 | | 3,178 | ||||||||||||
Property, plant and equipment, net |
75 | | 6,170 | | 6,245 | ||||||||||||
Intangible assets, net |
| | 8,925 | | 8,925 | ||||||||||||
Goodwill |
| | 14,382 | | 14,382 | ||||||||||||
Other |
241 | | 1,075 | | 1,316 | ||||||||||||
Investments |
|||||||||||||||||
Investments in associated companies and other investments |
95 | 41 | 2,821 | | 2,957 | ||||||||||||
Intragroup investments |
46,019 | 37,577 | | (83,596 | ) | | |||||||||||
Total investments |
46,114 | 37,618 | 2,821 | (83,596 | ) | 2,957 | |||||||||||
TOTAL ASSETS |
$ | 50,964 | $ | 37,618 | $ | 48,135 | $ | (83,596 | ) | $ | 53,121 | ||||||
LIABILITIES AND EQUITY |
|||||||||||||||||
Current liabilities: |
|||||||||||||||||
Borrowings |
$ | 2,008 | $ | | $ | 77 | $ | | $ | 2,085 | |||||||
Other current liabilities |
22 | | 8,532 | | 8,554 | ||||||||||||
Total current liabilities |
2,030 | | 8,609 | | 10,639 | ||||||||||||
Non-current liabilities: |
|||||||||||||||||
Borrowings |
12,108 | | 96 | | 12,204 | ||||||||||||
Other non-current liabilities |
235 | | 6,068 | | 6,303 | ||||||||||||
Intercompany |
21,182 | 14,394 | (35,576 | ) | | | |||||||||||
Redeemable noncontrolling interests |
| | 343 | | 343 | ||||||||||||
Equity |
15,409 | 23,224 | 68,595 | (83,596 | ) | 23,632 | |||||||||||
TOTAL LIABILITIES AND EQUITY |
$ | 50,964 | $ | 37,618 | $ | 48,135 | $ | (83,596 | ) | $ | 53,121 | ||||||
See notes to supplemental guarantor information
36
Table of Contents
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the six months ended December 31, 2009
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries |
|||||||||||||||
Operating activities: |
|||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | (391 | ) | $ | 137 | $ | 818 | $ | | $ | 564 | ||||||||
Investing activities: |
|||||||||||||||||||
Property, plant and equipment |
(3 | ) | | (385 | ) | | (388 | ) | |||||||||||
Investments |
(8 | ) | | (288 | ) | | (296 | ) | |||||||||||
Proceeds from sale of investments, non-current assets and business disposals |
| | 36 | | 36 | ||||||||||||||
Net cash used in investing activities |
(11 | ) | | (637 | ) | | (648 | ) | |||||||||||
Financing activities: |
|||||||||||||||||||
Borrowings |
989 | | 21 | | 1,010 | ||||||||||||||
Repayment of borrowings |
| | (75 | ) | | (75 | ) | ||||||||||||
Issuance of shares |
| 21 | | | 21 | ||||||||||||||
Dividends paid |
| (158 | ) | (25 | ) | | (183 | ) | |||||||||||
Other, net |
| | 2 | | 2 | ||||||||||||||
Net cash provided by (used in) financing activities |
989 | (137 | ) | (77 | ) | | 775 | ||||||||||||
Net increase in cash and cash equivalents |
587 | | 104 | | 691 | ||||||||||||||
Cash and cash equivalents, beginning of period |
4,479 | | 2,061 | | 6,540 | ||||||||||||||
Exchange movement on opening cash balance |
| | 35 | | 35 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 5,066 | $ | | $ | 2,200 | $ | | $ | 7,266 | |||||||||
See notes to supplemental guarantor information
37
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Supplemental Condensed Consolidating Statement of Cash Flows
For the six months ended December 31, 2008
(US$ in millions)
News America Incorporated |
News Corporation |
Non-Guarantor | Reclassifications and Eliminations |
News Corporation and Subsidiaries |
|||||||||||||||
Operating activities: |
|||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (440 | ) | $ | 170 | $ | (125 | ) | $ | | $ | (395 | ) | ||||||
Investing and other activities: |
|||||||||||||||||||
Property, plant and equipment |
(8 | ) | | (583 | ) | | (591 | ) | |||||||||||
Investments |
(7 | ) | (19 | ) | (503 | ) | | (529 | ) | ||||||||||
Proceeds from sale of investments, non-current assets and business disposals |
| | 973 | | 973 | ||||||||||||||
Net cash used in investing activities |
(15 | ) | (19 | ) | (113 | ) | | (147 | ) | ||||||||||
Financing activities: |
|||||||||||||||||||
Borrowings |
| | 47 | | 47 | ||||||||||||||
Repayment of borrowings |
(200 | ) | | (55 | ) | | (255 | ) | |||||||||||
Issuance of shares |
| 3 | 1 | | 4 | ||||||||||||||
Dividends paid |
| (154 | ) | (23 | ) | | (177 | ) | |||||||||||
Purchase of subsidiary shares from noncontrolling interest |
| | (11 | ) | | (11 | ) | ||||||||||||
Other, net |
| | 18 | | 18 | ||||||||||||||
Net cash used in financing activities |
(200 | ) | (151 | ) | (23 | ) | | (374 | ) | ||||||||||
Net decrease in cash and cash equivalents |
(655 | ) | | (261 | ) | | (916 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
2,275 | | 2,387 | | 4,662 | ||||||||||||||
Exchange movement on opening cash balance |
| | (125 | ) | | (125 | ) | ||||||||||||
Cash and cash equivalents, end of period |
$ | 1,620 | $ | | $ | 2,001 | $ | | $ | 3,621 | |||||||||
See notes to supplemental guarantor information
38
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Notes to Supplemental Guarantor Information
(1) | Investments in the Companys subsidiaries, for purposes of the supplemental consolidating presentation, are accounted for by their parent companies under the equity method of accounting whereby earnings of subsidiaries are reflected in the respective parent companys investment account and earnings. |
(2) | The guarantees of NAIs senior public indebtedness constitute senior indebtedness of the Company, and rank pari passu with all present and future senior indebtedness of the Company. Because the factual basis underlying the obligations created pursuant to the various facilities and other obligations constituting senior indebtedness of the Company differ, it is not possible to predict how a court in bankruptcy would accord priorities among the obligations of the Company. |
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This document contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words expect, estimate, anticipate, predict, believe and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this document and include statements regarding the intent, belief or current expectations of News Corporation, its directors or its officers with respect to, among other things, trends affecting News Corporations financial condition or results of operations. The readers of this document are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. More information regarding these risks, uncertainties and other factors is set forth under the heading Part II Other Information, Item 1A Risk Factors in this report. News Corporation does not ordinarily make projections of its future operating results and undertakes no obligation (and expressly disclaims any obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Readers should carefully review this document and the other documents filed by News Corporation with the Securities and Exchange Commission (SEC). This section should be read together with the unaudited consolidated financial statements of News Corporation and related notes set forth elsewhere herein and News Corporations Annual Report on Form 10-K for the fiscal year ended June 30, 2009 as filed with the SEC on August 12, 2009 (the 2009 Form 10-K).
INTRODUCTION
Managements discussion and analysis of financial condition and results of operations is intended to help provide an understanding of News Corporation and its subsidiaries (together News Corporation or the Company) financial condition, changes in financial condition and results of operations. This discussion is organized as follows:
| Overview of the Companys BusinessThis section provides a general description of the Companys businesses, as well as developments that have occurred to date during fiscal 2010 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends. |
| Results of OperationsThis section provides an analysis of the Companys results of operations for the three and six months ended December 31, 2009 and 2008. This analysis is presented on both a consolidated and a segment basis. In addition, a brief description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed. |
| Liquidity and Capital ResourcesThis section provides an analysis of the Companys cash flows for the six months ended December 31, 2009 and 2008. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Companys future commitments and obligations, as well as a discussion of other financing arrangements. |
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OVERVIEW OF THE COMPANYS BUSINESS
The Company is a diversified global media company, which manages and reports its businesses in eight segments. During the first quarter of fiscal 2010, the Company reclassified STAR Group Limited (STAR), which develops, produces and distributes television programming in Asia, from the Television segment to the Cable Network Programming segment. This reclassification was the result of a restructuring to combine the sales and distribution operations of the STAR channels with those of the Companys other international cable businesses. In addition, the Magazines and Inserts segment has been renamed the Integrated Marketing Services segment. The Company has revised its segment information for prior fiscal years to conform to the fiscal 2010 presentation. Beginning in fiscal 2010, the Companys eight segments are:
| Filmed Entertainment, which principally consists of the production and acquisition of live-action and animated motion pictures for distribution and licensing in all formats in all entertainment media worldwide, and the production and licensing of television programming worldwide. |
| Television, which principally consists of the broadcasting of network programming in the United States and the operation of 27 full power broadcast television stations, including nine duopolies, in the United States (of these stations, 17 are affiliated with the FOX network and ten are affiliated with the MyNetworkTV network). |
| Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems and direct broadcast satellite operators primarily in the United States, Latin America, Europe and Asia. |
| Direct Broadcast Satellite Television, which consists of the distribution of basic and premium programming services via satellite and broadband directly to subscribers in Italy. |
| Integrated Marketing Services, which principally consists of the publication of free-standing inserts, which are promotional booklets containing consumer offers distributed through insertion in local Sunday newspapers in the United States, and the provision of in-store marketing products and services, primarily to consumer packaged goods manufacturers in the United States and Canada. |
| Newspapers and Information Services, which principally consists of the publication of four national newspapers in the United Kingdom, the publication of approximately 146 newspapers in Australia, the publication of a metropolitan newspaper and a national newspaper (with international editions) in the United States and the provision of information services. |
| Book Publishing, which principally consists of the publication of English language books throughout the world. |
| Other, which principally consists of the Companys digital media properties and News Outdoor, an advertising business which offers display advertising in outdoor locations primarily throughout Russia and Eastern Europe. |
Filmed Entertainment
The Filmed Entertainment segment derives revenue from the production and distribution of feature motion pictures and television series. In general, motion pictures produced or acquired for distribution by the Company are exhibited in U.S. and foreign theaters, followed by home entertainment, video-on-demand and pay-per-view television, on-line and mobile distribution, premium subscription television, network television and basic cable and syndicated television exploitation. Television series initially produced for the networks and first-run syndication are generally licensed to domestic and international markets concurrently and subsequently released in seasonal DVD box sets. More successful series are later syndicated in domestic markets. The length of the revenue cycle for television series will vary depending on the number of seasons a series remains in active production and, therefore, may cause fluctuations in operating results. License fees received for television exhibition (including international and U.S. premium television and basic cable television) are recorded as revenue in the period that licensed films or programs are available for such exhibition, which may cause substantial fluctuations in operating results.
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The revenues and operating results of the Filmed Entertainment segment are significantly affected by the timing of the Companys theatrical and home entertainment releases, the number of its original and returning television series that are aired by television networks and the number of its television series in off-network syndication. Theatrical and home entertainment release dates are determined by several factors, including timing of vacation and holiday periods and competition in the marketplace. The distribution windows for the release of motion pictures theatrically and in various home entertainment formats have been compressing and may continue to change in the future. A further reduction in timing between theatrical and home entertainment releases could adversely affect the revenues and operating results of this segment.
The Company enters into arrangements with third parties to co-produce many of its theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. The parties to these arrangements include studio and non-studio entities, both domestic and foreign. In several of these agreements, other parties control certain distribution rights. The Filmed Entertainment segment records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and therefore, receive a participation based on the respective third-party investors interest in the profits or losses incurred on the film. Consistent with the requirements of Accounting Standards Codification (ASC) 926-605 EntertainmentFilmsRevenue Recognition, the estimate of a third-party investors interest in profits or losses incurred on the film is determined by reference to the ratio of actual revenue earned to date in relation to total estimated ultimate revenues.
Operating costs incurred by the Filmed Entertainment segment include: exploitation costs, primarily theatrical prints and advertising and home entertainment marketing and manufacturing costs; amortization of capitalized production, overhead and interest costs; and participations and talent residuals. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
The Company competes with other major studios, such as Disney, Paramount, Sony, Universal, Warner Bros. and independent film producers in the production and distribution of motion pictures and DVDs. As a producer and distributor of television programming, the Company competes with studios, television production groups and independent producers and syndicators, such as Disney, Sony, NBC Universal, Warner Bros. and Paramount Television, to sell programming both domestically and internationally. The Company also competes to obtain creative talent and story properties, which are essential to the success of the Companys filmed entertainment businesses.
Television and Cable Network Programming
The Companys television operations primarily consist of FOX Broadcasting Company (FOX), MyNetworkTV, Inc. (MyNetworkTV) and the 27 television stations owned by the Company.
The television operations derive revenues primarily from the sale of advertising. Adverse changes in general market conditions for advertising may affect revenues. The U.S. television broadcast environment is highly competitive and the primary methods of competition are the development and acquisition of popular programming. Program success is measured by ratings, which are an indication of market acceptance, with the top rated programs commanding the highest advertising prices. FOX and MyNetworkTV compete with other broadcast networks, such as CBS, ABC, NBC and The CW, independent television stations, cable program services, as well as other media, including DVDs, video games, print and the Internet for audiences and programming and, in the case of FOX, also for advertising revenues. In addition, FOX and MyNetworkTV compete with the other broadcast networks to secure affiliations with independently owned television stations in markets across the country.
The television stations owned by the Company compete for programming, audiences and advertising revenues with other television stations and cable networks in their respective coverage areas and, in some cases,
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with respect to programming, with other station groups, and in the case of advertising revenues, with other local and national media. The competitive position of the television stations owned by the Company is largely influenced by the strength of FOX and MyNetworkTV, and, in particular, the prime-time viewership of the respective network, as well as the quality of the programming of FOX and MyNetworkTV.
The Companys U.S. cable network operations primarily consist of the Fox News Channel (FOX News), the FX Network (FX), Regional Sports Networks (RSNs), the National Geographic Channels, SPEED and the Big Ten Network. The Companys international cable networks consist of the Fox International Channels (FIC) with channels primarily in Latin America, Europe and Asia and STAR with channels throughout Asia.
Generally, the Companys cable networks, which target various demographics, derive a majority of their revenues from monthly affiliate fees received from cable television systems and direct broadcast satellite (DBS) operators based on the number of their subscribers. Affiliate fee revenues are net of the amortization of cable distribution investments (capitalized fees paid to a cable operator or DBS operator to facilitate the launch of a cable network). The Company defers the cable distribution investments and amortizes the amounts on a straight-line basis over the contract period. Cable television and DBS are currently the predominant means of distribution of the Companys program services in the United States. Internationally, distribution technology varies region by region.
The Companys cable networks compete for carriage on cable television systems, DBS systems and other distribution systems with other program services. A primary focus of competition is for distribution of the Companys cable network channels that are not already distributed by particular cable television or DBS systems. For such program services, distributors make decisions on the use of bandwidth based on various considerations, including amounts paid by programmers for launches, subscription fees payable by distributors and appeal to the distributors subscribers.
The most significant operating expenses of the Television segment and the Cable Network Programming segment are the acquisition and production expenses related to programming and the production and technical expenses related to operating the technical facilities of the broadcaster or cable network. Other expenses include promotional expenses related to improving the market visibility and awareness of the broadcaster or cable network and its programming. Additional expenses include sales commissions paid to the in-house advertising sales force, as well as salaries, employee benefits, rent and other routine overhead expenses.
The Company has several multi-year sports rights agreements, including contracts with the National Football League (NFL) through fiscal 2014, contracts with the National Association of Stock Car Auto Racing (NASCAR) for certain races and exclusive rights for certain ancillary content through calendar year 2014 and a contract with Major League Baseball (MLB) through calendar year 2013. These contracts provide the Company with the broadcast rights to certain U.S. national sporting events during their respective terms. The costs of these sports contracts are charged to expense based on the ratio of each periods operating profit to estimated total operating profit for the remaining term of the contract.
The profitability of these long-term U.S. national sports contracts is based on the Companys best estimates at December 31, 2009 of directly attributable revenues and costs; such estimates may change in the future and such changes may be significant. Should revenues decline from estimates applied at December 31, 2009, additional amortization of rights may be recorded. Should revenues improve as compared to estimated revenues, the Company may have an improved operating profit related to the contract, which may be recognized over the estimated remaining contract term.
While the Company seeks to ensure compliance with federal indecency laws and related Federal Communications Commission (FCC) regulations, the definition of indecency is subject to interpretation and there can be no assurance that the Company will not broadcast programming that is ultimately determined by the FCC to violate the prohibition against indecency. Such programming could subject the Company to regulatory review or investigation, fines, adverse publicity or other sanctions, including the loss of station licenses.
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Direct Broadcast Satellite Television
The DBS segments operations consist of SKY Italia, which provides basic and premium programming services via satellite and broadband directly to subscribers in Italy. SKY Italia derives revenues principally from subscriber fees. The Company believes that the quality and variety of video, audio and interactive programming, quality of picture, access to service, customer service and price are the key elements for gaining and maintaining market share. SKY Italias competition includes companies that offer video, audio, interactive programming, telephony, data and other information and entertainment services, including broadband Internet providers, digital terrestrial transmission (DTT) services, wireless companies and companies that are developing new media technologies. The Company is currently prohibited from providing a pay DTT service under regulations of the European Commission.
SKY Italias most significant operating expenses are those related to the acquisition of entertainment, movie and sports programming and subscribers and the production and technical expenses related to operating the technical facilities. Operating expenses related to sports programming are generally recognized over the course of the related sport season, which may cause fluctuations in the operating results of this segment.
Integrated Marketing Services
The Integrated Marketing Services segment derives revenues from the sale of advertising space in free-standing inserts, in-store marketing products and services, promotional advertising and production fees. Adverse changes in general market conditions for advertising may affect revenues. Operating expenses for the Integrated Marketing Services segment include paper, promotional, printing, retail commissions, distribution and production costs. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
Newspapers and Information Services
The Newspapers and Information Services segment derives revenues primarily from the sale of advertising space, the sale of published newspapers, subscriptions and contract printing. Adverse changes in general market conditions for advertising may affect revenues. Circulation revenues can be greatly affected by changes in the cover prices of the Companys and/or competitors newspapers, as well as by promotional activities.
Operating expenses for the Newspapers and Information Services segment include costs related to newsprint, ink, printing, distribution and editorial content. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.
The Newspapers and Information Services segments advertising volume, circulation and the price of newsprint are the key variables whose fluctuations can have a material effect on the Companys operating results and cash flow. The Company has to anticipate the level of advertising volume, circulation and newsprint prices in managing its businesses to maximize operating profit during expanding and contracting economic cycles. Newsprint is a basic commodity and its price is sensitive to the balance of supply and demand. The Companys costs and expenses are affected by the cyclical increases and decreases in the price of newsprint. The newspapers published by the Company compete for readership and advertising with local and national newspapers and also compete with television, radio, Internet and other media alternatives in their respective markets. Competition for newspaper circulation is based on the news and editorial content of the newspaper, service, cover price and, from time to time, various promotions. The success of the newspapers published by the Company in competing with other newspapers and media for advertising depends upon advertisers judgments as to the most effective use of their advertising budgets. Competition for advertising among newspapers is based upon circulation levels, readership levels, reader demographics, internet reach, advertising rates and advertiser results. Such judgments are based on factors such as cost, availability of alternative media, circulation and quality of readership demographics. In recent years, the newspaper industry has experienced difficulty increasing circulation volume
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and revenues. This is due to, among other factors, increased competition from new media formats and sources and shifting preferences among some consumers to receive all or a portion of their news from sources other than a newspaper.
The Newspapers and Information Services segment also derives revenue from the provision of subscriber-based information services and the licensing of products and content to third-parties. Losses in the number of subscribers for these information services may affect revenues. The information services provided by the Company also compete with other media sources (free and subscription-based) and new media formats. Licensing revenues depend on new and renewed customer contracts, and may be affected if the Company is unable to generate new licensing business or if existing customers renew for lesser amounts, terminate early or forego renewal.
The Company believes that competition from new media formats and sources and shifting consumer preferences will continue to pose challenges within the Newspapers and Information Services industries.
Book Publishing
The Book Publishing segment derives revenues from the sale of general and childrens books in the United States and internationally. The revenues and operating results of the Book Publishing segment are significantly affected by the timing of the Companys releases and the number of its books in the marketplace. The book publishing marketplace is subject to increased periods of demand in the summer months and during the end-of-year holiday season. This market place continues to change due to technical innovations, electronic book devices and other factors. Each book is a separate and distinct product, and its financial success depends upon many factors, including public acceptance.
Major new title releases represent a significant portion of the Companys sales throughout the fiscal year. Consumer books are generally sold on a fully returnable basis, resulting in the return of unsold books. In the domestic and international markets, the Company is subject to global trends and local economic conditions.
Operating expenses for the Book Publishing segment include costs related to paper, printing, authors royalties, editorial, art and design expenses. Selling, general and administrative expenses include promotional expenses, salaries, employee benefits, rent and other routine overhead.
Other
The Other segment consists primarily of:
Digital Media Group
The Company sells advertising, sponsorships and subscription services on the Companys various digital media properties. Significant expenses associated with the companys digital media properties include development costs, advertising and promotional expenses, salaries, employee benefits and other routine overhead. The Companys digital media properties include, among others, MySpace.com, IGN.com and Fox Audience Network.
News Outdoor
News Outdoor sells outdoor advertising space on various media, primarily in Russia and Eastern Europe. Significant expenses associated with the News Outdoor business include site lease costs, direct production, maintenance and installation expenses, salaries, employee benefits and other routine overhead. The Company has announced that it intends to explore strategic options for News Outdoor in connection with News Outdoors continued development plans. The strategic options include, but are not limited to, exploring the opportunity to expand News Outdoors existing shareholder group through new partners. No agreement has yet been entered into with respect to any transaction.
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Other Business Developments
During the first quarter of fiscal 2010, the Company acquired additional shares of Sky Deutschland AG (Sky Deutschland), increasing its ownership from approximately 38% at June 30, 2009 to approximately 40% at December 31, 2009.
In December 2009, the Company announced that it had entered into an agreement with Sky Deutschland to subscribe to up to 49 million in newly registered shares of Sky Deutschland pursuant to a capital increase. Sky Deutschland completed this capital increase in January 2010 and, accordingly, the Company purchased 49 million newly registered shares of Sky Deutschland at a price of 2.25 per new share for an aggregate cost of approximately $158 million. As a result, News Corporations stake in Sky Deutschland increased to approximately 45%.
In January 2010, the Company sold its 33% interest in STOXX, Ltd. (STOXX), a European market index provider, for approximately $300 million in cash and additional consideration of up to approximately $40 million conditioned upon STOXX achieving specific performance objectives.
RESULTS OF OPERATIONS
Results of OperationsFor the three and six months ended December 31, 2009 versus the three and six months ended December 31, 2008.
The following table sets forth the Companys operating results for the three and six months ended December 31, 2009, as compared to the three and six months ended December 31, 2008.
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||||||
(in millions, except %) | ||||||||||||||||||||||
Revenues |
$ | 8,684 | $ | 7,871 | 10 | % | $ | 15,883 | $ | 15,380 | 3 | % | ||||||||||
Operating expenses |
(5,630 | ) | (5,161 | ) | 9 | % | (10,035 | ) | (9,732 | ) | 3 | % | ||||||||||
Selling, general and administrative |
(2,043 | ) | (1,588 | ) | 29 | % | (3,478 | ) | (3,269 | ) | 6 | % | ||||||||||
Depreciation and amortization |
(299 | ) | (283 | ) | 6 | % | (596 | ) | (579 | ) | 3 | % | ||||||||||
Impairment and restructuring charges |
(10 | ) | (8,465 | ) | * | * | (30 | ) | (8,473 | ) | * | * | ||||||||||
Equity earnings (losses) of affiliates |
58 | 30 | 93 | % | 90 | (329 | ) | * | * | |||||||||||||
Interest expense, net |
(269 | ) | (231 | ) | 16 | % | (514 | ) | (452 | ) | 14 | % | ||||||||||
Interest income |
16 | 20 | (20 | )% | 41 | 60 | (32 | )% | ||||||||||||||
Other, net |
(86 | ) | (98 | ) | (12 | )% | (98 | ) | 206 | * | * | |||||||||||
Income (loss) before income tax expense |
421 | (7,905 | ) | * | * | 1,263 | (7,188 | ) | * | * | ||||||||||||
Income tax (expense) benefit |
(137 | ) | 1,514 | * | * | (382 | ) | 1,333 | * | * | ||||||||||||
Net income (loss) |
284 | (6,391 | ) | * | * | 881 | (5,855 | ) | * | * | ||||||||||||
Less: Net income attributable to noncontrolling interests |
(30 | ) | (26 | ) | 15 | % | (56 | ) | (47 | ) | 19 | % | ||||||||||
Net income (loss) attributable to News Corporation stockholders |
$ | 254 | $ | (6,417 | ) | * | * | $ | 825 | $ | (5,902 | ) | * | * | ||||||||
** | not meaningful |
Overview The Companys revenues increased 10% and 3% for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009. The increases were primarily due to revenue increases at the Filmed Entertainment, Television, Cable Network Programming, and Book Publishing segments. The increases at the Filmed Entertainment segment were primarily due to increased worldwide theatrical and home entertainment revenues. Television segment revenues increased primarily due to increased MLB and prime-time advertising revenues. The increases at the Cable Network Programming segment
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were primarily due to increases in net affiliate revenues. The increases at the Book Publishing segment were primarily due to strong title offerings in fiscal 2010, with no comparable titles in the corresponding periods of fiscal 2009. These increases were partially offset by the decreased revenues at the Other segment, primarily due to the sale of a portion of the Companys ownership stake in NDS Group plc (NDS) in February 2009. As a result of the sale, the Companys portion of NDSs operating results subsequent to February 2009 is included within Equity earnings (losses) of affiliates.
Operating expenses for the three and six months ended December 31, 2009 increased 9% and 3%, respectively, as compared to the corresponding periods of fiscal 2009. The increases were primarily due to increased amortization of production and participation costs and higher home entertainment manufacturing and marketing costs at the Filmed Entertainment segment. Also contributing to these increases were higher entertainment and sports programming at the Television and Cable Network Programming segments, as well as unfavorable foreign currency fluctuations. These increases were partially offset by the absence of costs related to NDS in the Other segment, reflecting the sale of a portion of the Companys NDS ownership stake in February 2009, as well as the effects of company-wide cost containment initiatives.
Selling, General and Administrative expenses for the three and six months ended December 31, 2009 increased 29% and 6%, respectively, as compared to the corresponding periods of fiscal 2009. These increases were primarily due to the $500 million legal settlement charge with Valassis Communications, Inc. (Valassis) at the Integrated Marketing Services segment, as discussed in Note 13 to the accompanying unaudited consolidated financial statements, partially offset by the absence of costs related to NDS and the effects of company-wide cost containment initiatives.
Depreciation and amortization increased 6% and 3% for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009. These increases were primarily due to higher depreciation at the DBS segment resulting from higher volumes of set-top boxes, partially offset by the absence of depreciation and amortization related to NDS.
Impairment and restructuring chargesAs discussed in Note 4 to the accompanying unaudited consolidated financial statements, the Company recorded approximately $10 million and $30 million of additional restructuring charges in the unaudited consolidated statements of operations for the three and six months ended December 31, 2009, respectively. The restructuring charges for the three months ended December 31, 2009 reflect approximately $10 million recorded at the Other segment related to a restructuring program at the Companys Fox Mobile Entertainment division and accretion on facility termination obligations. The restructuring charges for the six months ended December 31, 2009 reflect an $18 million charge related to the sales and distribution operations of the STAR channels and a $12 million charge at the Other segment related to the restructuring program at the Companys Fox Mobile Entertainment division and accretion on facility termination obligations.
During the three and six months ended December 31, 2008, the Company recorded approximately $21 million and $29 million in restructuring charges, respectively, primarily reflecting restructuring charges recorded at the Newspapers and Information Services segment.
During the second quarter of fiscal 2009, the Company performed an interim impairment review in advance of its annual impairment assessment because the Company believed events had occurred and circumstances had changed that would more likely than not reduce the fair value of the Companys goodwill and indefinite-lived intangible assets below their carrying amounts. These events included: (a) the decline of the price of the Companys Class A common stock, par value $0.01 per share (Class A Common Stock), and Class B common stock, par value $0.01 per share (Class B Common Stock), below the carrying value of the Companys stockholders equity; (b) the reduced growth in advertising revenues; (c) the decline in the operating profit margins in some of the Companys advertising-based businesses; and (d) the decline in the valuations of other television stations, newspapers and advertising-based companies as determined by the current trading values of those companies.
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As a result of the interim impairment review performed, the Company recorded non-cash impairment charges of approximately $8.4 billion ($6.7 billion, net of tax) in the three and six months ended December 31, 2008. The charges consisted of a write-down of the Companys indefinite-lived intangible assets (primarily FCC licenses in the Television segment) of $4.6 billion, a write-down of $3.6 billion of goodwill and a write-down of the Newspapers and Information Services segments fixed assets of $185 million in accordance with ASC 360 Property, Plant and Equipment.
Equity earnings (losses) of affiliatesEquity earnings (losses) of affiliates increased $28 million for the three months ended December 31, 2009 as compared to the corresponding period of fiscal 2009, primarily due to higher contributions from British Sky Broadcasting Group plc (BSkyB) as a result of higher subscription revenues and the absence of the write-down related to BSkyBs ITV plc (ITV) investment recorded during the three months ended December 31, 2008. Equity earnings (losses) of affiliates increased $419 million during the six months ended December 31, 2009 as compared to the corresponding period of fiscal 2009, primarily due to the absence of a $422 million write-down of the Companys investment in Sky Deutschland and write-downs related to BSkyBs ITV investment recorded during the six months ended December 31, 2008.
For the three months ended December 31, |
For the six months ended December 31, |
||||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | ||||||||||||||
(in millions, except %) | |||||||||||||||||||
DBS equity affiliates |
$ | 26 | $ | 17 | 53 | % | $ | 31 | $ | (376 | ) | * | * | ||||||
Cable channel equity affiliates |
10 | 3 | * | * | 29 | 27 | 7 | % | |||||||||||
Other equity affiliates |
22 | 10 | * | * | 30 | 20 | 50 | % | |||||||||||
Total equity earnings (losses) of affiliates |
$ | 58 | $ | 30 | 93 | % | $ | 90 | $ | (329 | ) | * | * | ||||||
** | not meaningful |
Interest expense, net Interest expense, net for the three and six months ended December 31, 2009 increased $38 million and $62 million, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to the issuance of borrowings in February 2009 and August 2009. The increase in interest expense, net for the six months ended December 31, 2009 was partially offset by the retirement of $200 million of the Companys borrowings in October 2008.
Interest incomeInterest income decreased $4 million and $19 million for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to lower interest rates.
Other, net
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) |
||||||||||||||||
Loss on the Photobucket transaction (a) |
$ | (29 | ) | $ | | $ | (29 | ) | $ | | ||||||
Gain on the sale of the Stations (a) |
| | | 232 | ||||||||||||
Loss on the sale of eastern European television stations (a) |
(19 | ) | (100 | ) | (19 | ) | (100 | ) | ||||||||
Change in fair value of exchangeable securities and other financial instruments (b) |
| 14 | (4 | ) | 76 | |||||||||||
Other |
(38 | ) | (12 | ) | (46 | ) | (2 | ) | ||||||||
Total Other, net |
$ | (86 | ) | $ | (98 | ) | $ | (98 | ) | $ | 206 | |||||
(a) | See Note 2 Acquisitions, Disposals and Other Transactions to the accompanying unaudited consolidated financial statements. |
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(b) | The Company has certain outstanding exchangeable debt securities which contain embedded derivatives. Pursuant to ASC 815 Derivatives and Hedging, these embedded derivatives require separate accounting and, as such, changes in their fair value are recognized in other, net. A significant variance in the price of underlying stock could have a material impact on the operating results of the Company. |
Income tax expenseThe effective income tax rate for the three and six months ended December 31, 2009 was 33% and 30%, respectively, which was lower than the statutory tax rate of 35%, primarily due to permanent differences recognized in the six months ended December 31, 2009. The effective income tax rate for the three and six months ended December 31, 2008 was 19%, which was lower than the statutory tax rate of 35%, primarily due to non-deductible goodwill included within the impairment charge taken in the three months ended December 31, 2008 noted above.
Net income (loss)Net income (loss) for the three and six months ended December 31, 2009 increased as compared to the corresponding periods of fiscal 2009. These increases were primarily due to the absence of impairment charges noted above, partially offset by the charge related to settlement of the Valassis litigation. Also contributing to the increases were higher earnings from equity affiliates noted above. The increase during the six months ended December 31, 2009 was partially offset by the absence of the gain on the sale of eight of the Companys television stations in July 2008.
Segment Analysis:
The following table sets forth the Companys revenues and segment operating income for the three and six months ended December 31, 2009 as compared to the three and six months ended December 31, 2008.
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||||||
(in millions, except %) | ||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||
Filmed Entertainment |
$ | 1,898 | $ | 1,485 | 28 | % | $ | 3,419 | $ | 2,744 | 25 | % | ||||||||||
Television |
1,248 | 1,135 | 10 | % | 2,013 | 1,964 | 2 | % | ||||||||||||||
Cable Network Programming |
1,756 | 1,492 | 18 | % | 3,362 | 2,946 | 14 | % | ||||||||||||||
Direct Broadcast Satellite Television |
1,008 | 922 | 9 | % | 1,935 | 1,891 | 2 | % | ||||||||||||||
Integrated Marketing Services |
291 | 284 | 2 | % | 558 | 543 | 3 | % | ||||||||||||||
Newspapers and Information Services |
1,655 | 1,505 | 10 | % | 3,058 | 3,210 | (5 | )% | ||||||||||||||
Book Publishing |
381 | 305 | 25 | % | 691 | 620 | 11 | % | ||||||||||||||
Other |
447 | 743 | (40 | )% | 847 | 1,462 | (42 | )% | ||||||||||||||
Total revenues |
$ | 8,684 | $ | 7,871 | 10 | % | $ | 15,883 | $ | 15,380 | 3 | % | ||||||||||
Segment operating income: |
||||||||||||||||||||||
Filmed Entertainment |
$ | 324 | $ | 112 | * | * | $ | 715 | $ | 363 | 97 | % | ||||||||||
Television |
29 | (2 | ) | * | * | 67 | 82 | (18 | )% | |||||||||||||
Cable Network Programming |
604 | 448 | 35 | % | 1,117 | 798 | 40 | % | ||||||||||||||
Direct Broadcast Satellite Television |
(30 | ) | 10 | * | * | 98 | 175 | (44 | )% | |||||||||||||
Integrated Marketing Services |
(414 | ) | 86 | * | * | (341 | ) | 154 | * | * | ||||||||||||
Newspapers and Information Services |
259 | 200 | 30 | % | 284 | 341 | (17 | )% | ||||||||||||||
Book Publishing |
65 | 23 | * | * | 85 | 26 | * | * | ||||||||||||||
Other |
(125 | ) | (38 | ) | * | * | (251 | ) | (139 | ) | 81 | % | ||||||||||
Total segment operating income |
$ | 712 | $ | 839 | (15 | )% | $ | 1,774 | $ | 1,800 | (1 | )% | ||||||||||
** | not meaningful |
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Management believes that total segment operating income is an appropriate measure for evaluating the operating performance of the Companys business segments. Total segment operating income provides management, investors and equity analysts a measure to analyze 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). The following table reconciles total segment operating income to income (loss) before income taxes.
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in millions) | ||||||||||||||||
Total segment operating income |
$ | 712 | $ | 839 | $ | 1,774 | $ | 1,800 | ||||||||
Impairment and restructuring charges |
(10 | ) | (8,465 | ) | (30 | ) | (8,473 | ) | ||||||||
Equity earnings (losses) of affiliates |
58 | 30 | 90 | (329 | ) | |||||||||||
Interest expense, net |
(269 | ) | (231 | ) | (514 | ) | (452 | ) | ||||||||
Interest income |
16 | 20 | 41 | 60 | ||||||||||||
Other, net |
(86 | ) | (98 | ) | (98 | ) | 206 | |||||||||
Income (loss) before income tax expense |
$ | 421 | $ | (7,905 | ) | $ | 1,263 | $ | (7,188 | ) | ||||||
Filmed Entertainment (22% and 18% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009, respectively)
For the three and six months ended December 31, 2009, revenues at the Filmed Entertainment segment increased $413 million, or 28%, and $675 million, or 25%, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to increased worldwide theatrical and home entertainment revenues. Revenue increases for the three months ended December 31, 2009 were driven by the successful worldwide theatrical releases of Avatar and Alvin and the Chipmunks: The Squeakuel and the home entertainment performances of Ice Age: Dawn of the Dinosaurs, X-Men Origins: Wolverine and Night at the Museum: Battle of the Smithsonian. Also contributing to revenue in the three months ended December 31, 2009 was the worldwide home entertainment and pay television performance of Taken. For the six months ended December 31, 2009, revenues increased primarily due to the revenue increases in the three-month period noted above, as well as the theatrical performance of Ice Age: Dawn of the Dinosaurs. The three months ended December 31, 2008 included the worldwide home entertainment release of Horton Hears a Who, the worldwide theatrical releases of The Day the Earth Stood Still, Australia and Max Payne and the domestic theatrical release of Marley & Me.
For the three and six months ended December 31, 2009, the Filmed Entertainment segments operating income increased $212 million and $352 million, respectively, as compared to the corresponding periods of fiscal 2009. The increases were primarily due to the revenue increases noted above, partially offset by an increase in the amortization of production and participation costs, as well as higher home entertainment manufacturing and marketing costs. Higher releasing costs also partially offset revenue increases in the six months ended December 31, 2009.
Television (13% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009)
For the three and six months ended December 31, 2009, revenues at the Television segment increased $113 million, or 10%, and $49 million, or 2%, as compared to the corresponding periods of fiscal 2009, primarily due to increased MLB and prime-time advertising revenues. MLB advertising revenues increased primarily due to higher post-season ratings and the broadcast of two additional post-season games. The increase in prime-time advertising revenues was primarily due to additional commercial spots sold as compared to the corresponding periods of fiscal 2009. The increase in revenues during the six months ended December 31, 2009 was primarily due to the revenue increases noted above, partially offset by lower political advertising revenue due to the 2008 presidential election, as well as lower NFL revenues due to one less game broadcast and lower local advertising spending in the first quarter of fiscal 2010.
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The Television segment reported an increase in operating income for the three months ended December 31, 2009 of $31 million as compared to the corresponding period of fiscal 2009. The increase in operating income was primarily due to the revenue increase noted above and the effects of cost containment initiatives, as well as improved operating results at MyNetworkTV, partially offset by higher prime-time entertainment and MLB programming costs. Operating income for the six months ended December 31, 2009 decreased $15 million, or 18%, as compared to the corresponding period of fiscal 2009, as the revenue increases, cost containment initiatives and improved operating results at MyNetworkTV were more than offset by higher prime-time entertainment and MLB programming costs.
Cable Network Programming (21% and 19% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009, respectively)
For the three and six months ended December 31, 2009, revenues at the Cable Network Programming segment increased $264 million, or 18%, and $416 million, or 14%, respectively, as compared to the corresponding periods of fiscal 2009. The increases were primarily due to higher net affiliate revenues principally at Fox News, the RSNs and the Companys international cable operations. In addition, advertising revenue at the Companys international cable operations were higher.
For the three and six months ended December 31, 2009, Fox News revenues increased 27% and 28%, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to an increase in net affiliate revenues. Net affiliate revenues increased 67% and 71% for the three and six months ended December 31, 2009, respectively, primarily due to an increase in the average rate per subscriber and the number of subscribers as compared to the corresponding periods of fiscal 2009. As of December 31, 2009, Fox News reached approximately 98 million Nielsen households.
For the three and six months ended December 31, 2009, the RSNs revenues increased 12% and 9%, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to an increase in net affiliate revenues. Net affiliate revenues increased 13% and 12% for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to an increase in the average rate per subscriber and the number of subscribers. Advertising revenues decreased 9% during the six months ended December 31, 2009 as compared to the corresponding period of fiscal 2009, primarily due to reduced local advertising spending.
The Companys international cable operations revenues increased 23% and 16% for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to an increase in net affiliate revenues resulting from subscriber growth. Advertising revenue was also higher in the three and six months ended December 31, 2009 due to the launch of two regional channels in India.
The Companys other cable operations revenues increased as compared to the corresponding periods of fiscal 2009, primarily due to an increase in net affiliate revenues.
For the three and six months ended December 31, 2009, operating income at the Cable Network Programming segment increased $156 million, or 35%, and $319 million, or 40%, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to the revenue increases noted above. Also contributing to the increase during the six months ended December 31, 2009 was the absence of a settlement relating to the termination of a distribution agreement at the international cable operations during the first quarter of fiscal 2009. These increases were partially offset by increased operating expenses during the three and six months ended December 31, 2009 of $108 million and $97 million, respectively, as compared to the corresponding periods of
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fiscal 2009. The increases in operating expenses during the three and six months ended December 31, 2009 were due to higher movie acquisition costs, sports rights amortization and original programming costs.
Direct Broadcast Satellite Television (12% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009)
For the three and six months ended December 31, 2009, SKY Italias revenues increased $86 million, or 9%, and $44 million, or 2%, respectively, as compared to the corresponding periods of fiscal 2009, due to favorable foreign exchange movements. SKY Italia had a decrease of approximately 16,000 in subscribers over the past twelve month period, which decreased SKY Italias total subscriber base to 4.7 million at December 31, 2009. The total churn for the three months ended December 31, 2009 was approximately 213,000 subscribers on an average subscriber base of 4.8 million, as compared to churn of approximately 148,000 subscribers on an average subscriber base of 4.7 million in the corresponding period of fiscal 2009. Subscriber churn for the period represents the number of SKY Italia subscribers whose service was disconnected during the period. During the three and six months ended December 31, 2009, the weakening of the U.S. dollar against the Euro resulted in an increase in revenue of approximately 12% and 3%, respectively, as compared to the corresponding periods of fiscal 2009.
Average revenue per subscriber (ARPU) of approximately 43 in the three months ended December 31, 2009 decreased from approximately 45 reported in the corresponding period of fiscal 2009. ARPU of approximately 42 in the six months ended December 31, 2009 decreased from approximately 44 reported in the corresponding period of fiscal 2009. The decreases in ARPU for the three and six months ended December 31, 2009 were primarily due to a lower average tier mix, reduced pay-per-view revenue and the lagged effect of various pricing promotions. SKY Italia calculates ARPU by dividing total subscriber-related revenues for the period by the average subscribers for the period and dividing that amount by the number of months in the period. Subscriber-related revenues are comprised of total subscription revenue, pay-per-view revenue and equipment rental revenue for the period. Average subscribers are calculated for the respective periods by adding the beginning and ending subscribers for the period and dividing by two.
Subscriber acquisition costs per subscriber (SAC) of approximately 440 in the second quarter of fiscal 2010 increased from the second quarter of fiscal 2009, primarily due to higher marketing costs on a per subscriber basis. SAC is calculated by dividing total subscriber acquisition costs for a period by the number of gross SKY Italia subscribers added during the period. Subscriber acquisition costs include the cost of the commissions paid to retailers and other distributors, the cost of equipment sold directly by SKY Italia to subscribers and the costs related to installation and acquisition advertising, net of any upfront activation fee. SKY Italia excludes the value of equipment capitalized under SKY Italias equipment lease program, as well as payments and the value of returned equipment related to disconnected lease program subscribers from subscriber acquisition costs.
For the three and six months ended December 31, 2009, SKY Italias operating income decreased $40 million and $77 million, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to an increase in operating expenses. The increase in operating expenses was primarily due to higher programming costs and premium service initiatives, as well as higher sports rights amortization. During the three and six months ended December 31, 2009, the weakening of the U.S. dollar against the Euro resulted in a decrease in operating income of approximately 30% and 6%, respectively, as compared to the corresponding periods of fiscal 2009.
Integrated Marketing Services (4% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009)
For the three and six months ended December 31, 2009, revenues at the Integrated Marketing Services segment increased $7 million, or 2%, and $15 million, or 3%, respectively, as compared to the corresponding
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periods of fiscal 2009, primarily due to an increase in volume of in-store marketing products sold, partially offset by lower revenues for free-standing insert products.
Operating income at the Integrated Marketing Services segment decreased $500 million and $495 million for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009, as the revenue increases noted above were more than offset by the $500 million charge relating to the settlement of the Valassis litigation.
Newspapers and Information Services (19% and 21% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009, respectively)
For the three months ended December 31, 2009, revenues at the Newspapers and Information Services segment increased $150 million, or 10%, as compared to the corresponding period of fiscal 2009, primarily due to favorable foreign exchange fluctuations at the Australian newspapers. For the six months ended December 31, 2009, revenues at the Newspapers and Information Services segment decreased $152 million, or 5%, as compared to the corresponding period of fiscal 2009, primarily due to general reductions in advertising spending.
Operating income at the Newspapers and Information Services segment increased $59 million, or 30%, for the three months ended December 31, 2009 as compared to the corresponding period of fiscal 2009, primarily due to the revenue increases noted above, as well as the impact of cost containment initiatives. Operating income decreased $57 million, or 17%, for the six months ended December 31, 2009 as compared to the corresponding period of fiscal 2009, primarily due to the decrease in revenues noted above, partially offset by the impact of cost containment initiatives.
For the three and six months ended December 31, 2009, the Australian newspapers revenues increased 32% and 3%, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to favorable foreign exchange fluctuations. The weakening of the U.S. dollar against the Australian dollar resulted in revenue increases of approximately 36% and 12% for the three and six months ended December 31, 2009, respectively, as compared to the corresponding periods of fiscal 2009. These increases were partially offset by lower circulation and advertising revenues. Local currency revenues decreased for both the three and six months ended December 31, 2009. For the three months ended December 31, 2009, the Australian newspapers operating income increased 19% as compared to the corresponding period of fiscal 2009, primarily due to the revenue increases noted above. For the six months ended December 31, 2009, the Australian newspapers operating income decreased 19% as compared to the corresponding period of fiscal 2009, primarily due to lower advertising revenues, partially offset by a reduction in operating costs resulting from cost containment initiatives.
For the three and six months ended December 31, 2009, the U.K. newspapers revenues increased 2% and decreased 10%, respectively, as compared to the corresponding periods of fiscal 2009. The increase for the three months ended December 31, 2009 as compared to the corresponding period of fiscal 2009 was primarily due to the impact of favorable foreign exchange fluctuations. The decrease for the six months ended December 31, 2009 as compared to the corresponding period of fiscal 2009 was primarily due to lower circulation revenue and lower classified and display advertising revenues across most titles. Operating income at the U.K. newspapers for the three months ended December 31, 2009 increased 46% as compared to the corresponding period of fiscal 2009, primarily due to lower marketing costs and the impact of cost containment initiatives. Operating income for the six months ended December 31, 2009 decreased 26% as compared to the corresponding period of fiscal 2009, primarily due to higher newsprint costs due to an increase in newsprint price partially offset by lower marketing expenses and the impact of cost containment initiatives.
During the three months ended December 31, 2009, revenues at Dow Jones & Company, Inc (Dow Jones) were relatively consistent with the corresponding period of fiscal 2009, as increased advertising and circulation revenues at The Wall Street Journal were offset by lower information services revenues. Dow Jones operating results for the three months ended December 31, 2009 increased 26% from the corresponding period of fiscal
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2009, primarily due to cost containment initiatives, lower headcount and other employee related costs. Revenues for the six months ended December 31, 2009 decreased 6% as compared to the corresponding period of fiscal 2009, primarily due to lower advertising revenues at The Wall Street Journal and lower information services revenue, partially offset by higher circulation revenues resulting from higher pricing at The Wall Street Journal and higher digital advertising revenue. Dow Jones operating results for the six months ended December 31, 2009 were relatively consistent with those of the corresponding period of fiscal 2009, as the revenue decreases noted above were offset by cost containment initiatives, lower headcount and other employee related costs.
Book Publishing (4% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009)
For the three and six months ended December 31, 2009, revenues at the Book Publishing segment increased $76 million, or 25%, and $71 million, or 11%, respectively, as compared to the corresponding periods of fiscal 2009. The increases were primarily due to higher sales at the General Books and Childrens divisions. The increases at the General Books division were primarily due to the success of Going Rogue by Sarah Palin. Strong backlist sales of Where the Wild Things Are by Maurice Sendak and The Vampire Diaries by L.J. Smith led to the increases at the Childrens division. During the three months ended December 31, 2009, HarperCollins had 48 titles on The New York Times Bestseller List with seven titles reaching the number one position. During the six months ended December 31, 2009, HarperCollins had 78 titles on The New York Times Bestseller List with eleven titles reaching the number one position.
Operating income for the three and six months ended December 31, 2009 increased $42 million and $59 million, respectively, as compared to the corresponding periods of fiscal 2009, primarily due to the revenue increases noted above, partially offset by higher royalty and manufacturing costs resulting from the increased revenues.
Other (5% and 9% of the Companys consolidated revenues in the first six months of fiscal 2010 and 2009, respectively)
For the three and six months ended December 31, 2009, revenues at the Other segment decreased $296 million and $615 million, respectively, as compared to the corresponding periods of fiscal 2009. The decreases were primarily due to decreased revenues from NDS, News Outdoor and the Companys digital media properties. The decreases at NDS were due to the absence of $188 million and $352 million of revenues for the three and six months ended December 31, 2009, respectively, reflecting the sale of a portion of the Companys ownership stake in NDS in February 2009. As a result of the sale, the Companys portion of NDSs operating results subsequent to February 2009 is included within Equity earnings (losses) of affiliates. The revenue decreases at the Companys digital media properties were principally due to lower search and advertising revenues. News Outdoors revenue decreases were primarily due to a general downturn in the advertising markets and unfavorable foreign exchange fluctuations.
Operating results for the three and six months ended December 31, 2009 decreased $87 million and $112 million, respectively, as compared to the corresponding periods of fiscal 2009. The decreases were primarily due to the absence of operating results from NDS and lower operating results from the Companys digital media properties. The decreases at NDS were due to the absence of $32 million and $62 million of NDSs operating income during the three and six months ended December 31, 2009, respectively, resulting from the sale of a portion of the Companys ownership stake in NDS as noted above. The decreases at the Companys digital media properties of $32 million and $52 million for the three and six months ended December 31, 2009, respectively, were primarily due to the revenue declines noted above.
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Liquidity and Capital Resources
Impact of the Current Economic Environment
The United States and global economies have undergone a period of economic uncertainty, and the related capital markets have experienced significant volatility. In certain of the markets in which the Companys businesses operate there was a weakening in the overall economic climate resulting in pressure on labor markets, retail sales and consumer confidence. These recent economic trends reduced advertising revenues at the Companys Television, Newspapers and Information Services and Other segments, as well as the retail sales of books and DVDs. Despite these trends, the Company believes the cash generated internally and available financing will continue to provide the Company sufficient liquidity for the foreseeable future.
Current Financial Condition
The Companys principal source of liquidity is internally generated funds. The Company also has a $2.25 billion revolving credit facility, which expires in May 2012, and has access to various film co-production alternatives to supplement its cash flows. In addition, the Company has access to the worldwide capital markets, subject to market conditions. As of December 31, 2009, the availability under the revolving credit facility was reduced by stand-by letters of credit issued which totaled approximately $73 million. As of December 31, 2009, the Company was in compliance with all of the covenants under the revolving credit facility, and it does not anticipate any violation of such covenants. The Companys internally generated funds are highly dependent upon the state of the advertising markets and public acceptance of its film and television products.
The principal uses of cash that affect the Companys liquidity position include the following: investments in the production and distribution of new feature films and television programs; the acquisition of and payments under programming rights for entertainment and sports programming; paper purchases; operational expenditures including employee costs; capital expenditures; interest expense; income tax payments; investments in associated entities; dividends; acquisitions; and stock repurchases.
The Company has evaluated, and expects to continue to evaluate, possible acquisitions and dispositions of certain businesses. Such transactions may be material and may involve cash, the Companys securities or the assumption of additional indebtedness.
Sources and uses of cash
Net cash provided by (used in) operating activities for the six months ended December 31, 2009 and 2008 was as follows (in millions):
For the six months ended December 31, |
2009 | 2008 | |||||
Net cash provided by (used in) operating activities |
$ | 564 | $ | (395 | ) | ||
The increase in net cash provided by operating activities during the six months ended December 31, 2009 as compared to the corresponding period of fiscal 2009 primarily reflects higher worldwide theatrical receipts at the Filmed Entertainment segment, higher affiliate receipts at the Cable Network Programming segment, higher receipts at the Book Publishing segment and lower tax payments.
Net cash used in investing activities for the six months ended December 31, 2009 and 2008 was as follows (in millions):
For the six months ended December 31, |
2009 | 2008 | ||||||
Net cash used in investing activities |
$ | (648 | ) | $ | (147 | ) | ||
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The increase in net cash used in investing activities during the six months ended December 31, 2009 was primarily due to the absence of proceeds from the sale of eight of the Companys television stations in July 2008, partially offset by lower property, plant and equipment purchases.
Net cash provided by (used in) financing activities for the six months ended December 31, 2009 and 2008 was as follows (in millions):
For the six months ended December 31, |
2009 | 2008 | |||||
Net cash provided by (used in) financing activities |
$ | 775 | $ | (374 | ) | ||
The increase in net cash provided by financing activities during the six months ended December 31, 2009 was primarily due to the issuance of $600 million 6.90% Senior Notes due 2039 and $400 million 5.65% Senior Notes due 2020 in August 2009, partially offset by the repayment of borrowings related to bank loans.
The Company declared a dividend of $0.06 per share on both its Class A Common Stock and its Class B Common Stock in the three months ended September 30, 2009, which was paid in October 2009 to stockholders of record on September 9, 2009. The total aggregate dividend paid to stockholders in October 2009 was approximately $157 million.
In February 2010, the Company announced that it had it increased its dividend to $0.075 per share on both its Class A Common Stock and its Class B Common Stock. This will increase the total aggregate cash dividends expected to be paid to stockholders in April 2010 by approximately 25%.
Debt Instruments
For the six months ended December 31, |
||||||||
2009 | 2008 | |||||||
(in millions) | ||||||||
Borrowings |
||||||||
Notes due 2039 |
$ | 593 | $ | | ||||
Notes due 2020 |
396 | | ||||||
Bank loans |
| 30 | ||||||
All other |
21 | 17 | ||||||
Total borrowings |
$ | 1,010 | $ | 47 | ||||
Repayments of borrowings |
||||||||
Notes due October 2008 |
$ | | $ | (200 | ) | |||
Bank loans |
(64 | ) | (32 | ) | ||||
All other |
(11 | ) | (23 | ) | ||||
Total repayment of borrowings |
$ | (75 | ) | $ | (255 | ) | ||
Other
NAIs 0.75% Senior Exchangeable BUCS (BUCS) in the amount of $1,641 million are classified as current borrowings. The holders of the BUCS have the right to tender the BUCS for redemption on March 15, 2010 for payment of the adjusted liquidation preference of the BUCS plus accrued and unpaid distributions and any final period distribution in, at the Companys election, cash, ordinary shares of BSkyB, Class A Common Stock or any combination thereof. The Company may redeem the BUCS for cash, ordinary shares of BSkyB or a combination thereof in whole or in part, at any time on or after March 20, 2010, at the adjusted liquidation preference of the BUCS plus any accrued and unpaid distributions and any final period distribution thereon. On
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February 1, 2010, the Company announced that NAI gave notice to holders of the BUCS that any BUCS tendered at the option of the holders on the March 15, 2010 holder redemption date would be redeemed for cash at the specified redemption amount equal to $1,013.48 per BUCS, which represents the amount equal to the adjusted liquidation preference of such BUCS plus an amount equal to any accrued and unpaid distributions and any final period distribution.
The Companys $150 million 4.75% Senior Debentures due March 2010 are classified as current borrowings.
Ratings of the Public Debt
The table below summarizes the Companys credit ratings as of December 31, 2009.
Rating Agency |
Senior Debt | Outlook | ||
Moodys |
Baa1 | Stable | ||
S&P |
BBB+ | Stable |
Revolving Credit Agreement
In May 2007, NAI entered into a credit agreement (the Credit Agreement), among NAI as Borrower, the Company as Parent Guarantor, the initial lenders named therein (the Lenders), Citibank, N.A. as Administrative Agent and JPMorgan Chase Bank, N.A. as Syndication Agent. The Credit Agreement provides a $2.25 billion unsecured revolving credit facility with a sub-limit of $600 million available for the issuance of letters of credit. NAI may request an increase in the amount of the credit facility up to a maximum amount of $2.5 billion. Borrowings are in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the agreement include the requirement that the Company maintain specific leveraging ratios and limitations on secured indebtedness. The Company pays a facility fee of 0.08% regardless of facility usage. The Company pays interest for borrowings at LIBOR plus 0.27% and pays commission fees on letters of credit at 0.27%. The Company pays an additional fee of 0.05% if borrowings under the facility exceed 50% of the committed facility. The interest and fees are based on the Companys current debt rating. The maturity date is in May 2012; however, NAI may request that the Lenders commitments be renewed for up to two additional one year periods. As of December 31, 2009, approximately $73 million in standby letters of credit, for the benefit of third parties, was outstanding.
Commitments
During the six months ended December 31, 2009, the Company renewed its rights to broadcast Italys National League Football matches through fiscal 2012. The Company expects to pay approximately $1.7 billion over the term of the agreement.
During the second quarter of fiscal 2010, the Company entered into a long-term supply contract pursuant to which the Company will purchase ink for its newspaper printing facilities in the United Kingdom from a third party through fiscal 2022. The Company will pay approximately $400 million over the term of the contract.
On January 30, 2010, the Company announced that its News America Marketing unit had settled its litigation with Valassis Communications, Inc. for $500 million. The Company expects to pay this amount in fiscal 2010.
Other than as previously disclosed in the notes to the Companys unaudited consolidated financial statements, the Companys commitments have not changed significantly from disclosures included in the 2009 Form 10-K.
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Guarantees
The Companys guarantees have not changed significantly from disclosures included in the 2009 Form 10-K.
Contingencies
Other than as disclosed in the notes to the accompanying unaudited consolidated financial statements, the Company is party to several purchase and sale arrangements which become exercisable over the next ten years by the Company or the counter-party to the agreement. In the next twelve months, none of these arrangements that become exercisable are material.
The Company experiences routine litigation in the normal course of its business. On January 30, 2010, the Company announced that its News America Marketing unit had settled its previously reported litigation with Valassis for $500 million. The Company believes that none of its other pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
The Companys operations are subject to tax in various domestic and international jurisdictions and as a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. The Company believes it has appropriately accrued for the expected outcome of all other pending tax matters that it can estimate at this time and does not currently anticipate that the ultimate resolution of other pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity.
Goodwill
In accordance with ASC 350 IntangiblesGoodwill and Other, the Companys goodwill and indefinite-lived intangible assets, which include FCC licenses, are reviewed annually for impairment or earlier if events occur or circumstances change that would more likely than not reduce the fair value of the Companys goodwill and indefinite-lived intangibles below their carrying amount. During the second quarter of fiscal 2009, the Company performed an interim impairment review in advance of its annual impairment assessment because the Company believed events had occurred and circumstances had changed that would more likely than not reduce the fair value of the Companys goodwill and indefinite-lived intangible assets below their carrying amounts. These events included: (a) the decline of the price of the Class A Common Stock and Class B Common Stock below the carrying value of the Companys stockholders equity; (b) the reduced growth in advertising revenues; (c) the decline in the operating profit margins in some of the Companys advertising-based businesses; and (d) the decline in the valuations of other television stations, newspapers and advertising-based companies as determined by the current trading values of those companies. In addition, the Company also performed an annual impairment assessment of its goodwill and indefinite-lived intangible assets.
The Companys goodwill impairment reviews are determined using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including goodwill. In performing the first step, the Company determines the fair value of a reporting unit by primarily using a discounted cash flow analysis and market-based valuation approach methodologies. Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows. The cash flows employed in the analyses are based on the Companys estimated outlook and various growth rates have been assumed for years beyond the long-term business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. In assessing the reasonableness of its determined fair values, the Company evaluates its results against other value indicators, such as comparable public company trading values.
The Company performed impairment reviews consisting of a comparison of the estimated fair value of the Companys FCC licenses with their carrying amount on a station-by-station basis using a discounted cash flow valuation method, assuming a hypothetical start-up scenario for a broadcast station in each of the markets the
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Company operates in. The significant assumptions used were the discount rate and terminal growth rates and operating margins, as well as industry data on future advertising and other revenues in the markets where the Company owns television stations. These assumptions were based on actual historical performance in each market and estimates of future performance in each market. These assumptions took into account the weakening of advertising markets that had affected both the national and local markets in which the Companys stations operate.
As a result of the impairment reviews performed, the Company recorded non-cash impairment charges of approximately $8.9 billion ($7.2 billion, net of tax) during the fiscal year ended June 30, 2009. The charges consisted of a write-down of the Companys indefinite-lived intangible assets (primarily FCC licenses in the Television segment) of $4.6 billion, a write-down of $4.1 billion of goodwill (primarily in the Newspapers and Information Services and Other segments) and a write-down of the Newspapers and Information Services segments fixed assets of $185 million in accordance with ASC 360 Property, Plant and Equipment. The factors that contributed to the fiscal 2009 impairment charges and the key assumptions that drive fair value have improved during the six months ended December 31, 2009; however, the following segments have reporting units that continue to be at risk for future impairment as the fair value of a reporting unit exceeded its carrying amount by less than 10% as of the last goodwill impairment assessment performed: Newspapers and Information Services; Television; and Cable Network Programming. In addition, the Company continues to monitor certain of its reporting units in the Other segment due to the impairment charges recorded in fiscal 2009. Goodwill amounts by segment at risk for future impairment are as follows: Newspapers and Information Services ($1.9 billion); Television ($1.9 billion); Cable Network Programming ($0.9 billion); and Other ($0.6 billion). The Company will continue to monitor its goodwill and intangible assets for possible future impairment.
Recent Accounting Pronouncements
See Note 1Basis of Presentation to the accompanying unaudited consolidated financial statements for discussion of recent accounting pronouncements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company has exposure to several types of market risk: changes in foreign currency exchange rates, interest rates, and stock prices. The Company neither holds nor issues financial instruments for trading purposes.
The following sections provide quantitative information on the Companys exposure to foreign currency exchange rate risk, interest rate risk and stock price risk. The Company makes use of sensitivity analyses that are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.
Foreign Currency Exchange Rates
The Company conducts operations in four principal currencies: the U.S. dollar; the British pound sterling; the Euro; and the Australian dollar. These currencies operate as the functional currency for the Companys U.S., United Kingdom, Italian and Australian operations, respectively. Cash is managed centrally within each of the four regions with net earnings reinvested locally and working capital requirements met from existing liquid funds. To the extent such funds are not sufficient to meet working capital requirements, drawdowns in the appropriate local currency are available from intercompany borrowings. Since earnings of the Companys Australian, United Kingdom and Italian operations are expected to be reinvested in those businesses indefinitely, the Company does not hedge its investment in the net assets of those foreign operations.
At December 31, 2009, the Companys outstanding financial instruments with foreign currency exchange rate risk exposure had an aggregate fair value of $71 million (including the Companys non-U.S. dollar-denominated fixed rate debt). The potential increase in the fair values of these instruments resulting from a 10% adverse change in quoted foreign currency exchange rates would be approximately $6.9 million at December 31, 2009.
Interest Rates
The Companys current financing arrangements and facilities include approximately $15.3 billion of outstanding debt with fixed interest and the Credit Agreement, which carries variable interest. Fixed and variable rate debts are impacted differently by changes in interest rates. A change in the interest rate or yield of fixed rate debt will only impact the fair market value of such debt, while a change in the interest rate of variable debt will impact interest expense, as well as the amount of cash required to service such debt. As of December 31, 2009, substantially all of the Companys financial instruments with exposure to interest rate risk were denominated in U.S. dollars and had an aggregate fair value of approximately $16.3 billion. The potential change in fair market value for these financial instruments from an adverse 10% change in quoted interest rates across all maturities, often referred to as a parallel shift in the yield curve, would be approximately $791 million at December 31, 2009.
Stock Prices
The Company has common stock investments in several publicly traded companies that are subject to market price volatility. These investments principally represent the Companys equity affiliates and had an aggregate fair value of approximately $7.6 billion as of December 31, 2009. A hypothetical decrease in the market price of these investments of 10% would result in a fair value of approximately $6.8 billion. Such a hypothetical decrease would result in a before tax decrease in comprehensive income of approximately $24 million, as any changes in fair value of the Companys equity affiliates are not recognized unless deemed other-than-temporary, as these investments are accounted for under the equity method.
In accordance with ASC 815 Derivatives and Hedging, the Company has recorded the conversion feature embedded in its exchangeable debentures in other liabilities. At December 31, 2009, the fair value of this conversion feature was nil. This conversion feature is sensitive to movements in the share price of one of the Companys publicly traded equity affiliates. A significant variance in the price of the underlying stock could have a material impact on the operating results of the Company.
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Credit Risk
Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
The Companys receivables did not represent significant concentrations of credit risk at December 31, 2009 or June 30, 2009 due to the wide variety of customers, markets and geographic areas to which the Companys products and services are sold. However, in light of the recent turmoil in the domestic and global economies, the Companys estimates and judgments with respect to the collectability of its receivables have become subject to greater uncertainty than in more stable periods.
The Company monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. At December 31, 2009, the Company did not anticipate nonperformance by any of the counterparties.
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PART I
ITEM 4. | CONTROLS AND PROCEDURES |
(a) | Disclosure Controls and Procedures |
The Companys management, with the participation of the Companys Chairman and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this quarterly report. Based on such evaluation, the Companys Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including the Companys Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) | Internal Control Over Financial Reporting |
There has been no change in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the Companys second quarter of fiscal 2010 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II
ITEM 1. | LEGAL PROCEEDINGS |
See Note 13-Contingencies to the unaudited consolidated financial statements, which is incorporated herein by reference.
ITEM 1A. | RISK FACTORS |
Prospective investors should consider carefully the risk factors set forth below before making an investment in the Companys securities.
Global Economic Conditions May Have a Continuing Adverse Effect on the Companys Business.
The United States and global economies have undergone a period of economic uncertainty, which caused, among other things, a general tightening in the credit markets, limited access to the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, lower consumer and business spending and lower consumer net worth. The resulting pressure on the labor and retail markets and the downturn in consumer confidence weakened the economic climate in certain markets in which the Company does business and has had and may continue to have an adverse effect on the Companys business, results of operations, financial condition and liquidity. A continued decline in these economic conditions could further impact the Companys business, reduce the Companys advertising and other revenues and negatively impact the performance of its motion pictures and home entertainment releases, television operations, newspapers, books and other consumer products. In addition, these conditions could also impair the ability of those with whom the Company does business to satisfy their obligations to the Company. As a result, the Companys results of operations may be adversely affected. Although the Company believes that its operating cash flow and current access to capital and credit
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markets, including the Companys existing credit facility, will give it the ability to meet its financial needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair the Companys liquidity or increase its cost of borrowing.
A Decline in Advertising Expenditures Could Cause the Companys Revenues and Operating Results to Decline Significantly in any Given Period or in Specific Markets.
The Company derives substantial revenues from the sale of advertising on or in its television stations, broadcast and cable networks, newspapers, integrated marketing services, digital media properties and DBS services. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as budgeting and buying patterns. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers spending priorities. Demand for the Companys products is also a factor in determining advertising rates. For example, ratings points for the Companys television stations, broadcast and cable networks and circulation levels for the Companys newspapers are factors that are weighed when determining advertising rates, and with respect to the Companys television stations and broadcast and television networks, when determining the affiliate rates received by the Company. In addition, newer technologies, including new video formats, streaming and downloading capabilities via the Internet, video-on-demand, personal video recorders and other devices and technologies are increasing the number of media and entertainment choices available to audiences. Some of these devices and technologies allow users to view television or motion pictures from a remote location or on a time-delayed basis and provide users the ability to fast-forward, rewind, pause and skip programming. These technological developments are increasing the number of media and entertainment choices available to audiences and may cause changes in consumer behavior that could affect the attractiveness of the Companys offerings to viewers, advertisers and/or distributors. A decrease in advertising expenditures or reduced demand for the Companys offerings can lead to a reduction in pricing and advertising spending, which could have an adverse effect on the Companys businesses.
Acceptance of the Companys Film and Television Programming by the Public is Difficult to Predict, Which Could Lead to Fluctuations in Revenues.
Feature film and television production and distribution are speculative businesses since the revenues derived from the production and distribution of a feature film or television series depend primarily upon its acceptance by the public, which is difficult to predict. The commercial success of a feature film or television series also depends upon the quality and acceptance of other competing films and television series released into the marketplace at or near the same time, the availability of a growing number of alternative forms of entertainment and leisure time activities, general economic conditions and their effects on consumer spending and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. Further, the theatrical success of a feature film and the audience ratings for a television series are generally key factors in generating revenues from other distribution channels, such as home entertainment and premium pay television, with respect to feature films, and syndication, with respect to television series.
The Company Could Suffer Losses Due to Asset Impairment Charges for Goodwill, Intangible Assets (including FCC Licenses) and Programming.
In accordance with applicable generally accepted accounting principles, the Company performs an annual impairment assessment of its recorded goodwill and indefinite-lived intangible assets, including FCC licenses, during the fourth quarter of each fiscal year. The Company also continually evaluates whether current factors or indicators, such as the prevailing conditions in the capital markets, require the performance of an interim impairment assessment of those assets, as well as other investments and other long-lived assets. Management believes that recent trends in the reduced growth in advertising revenues and the decline in profit margins in some of the Companys advertising-based businesses and valuations of its television stations, newspapers, and other advertising-based companies have negatively affected investors outlooks on the Companys market value. Any significant shortfall, now or in the future, in advertising revenue and/or the expected popularity of the
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programming for which the Company has acquired rights could lead to a downward revision in the fair value of certain reporting units, particularly those in the Newspapers and Information Services, Television and Cable Network Programming segments. A downward revision in the fair value of a reporting unit, indefinite-lived intangible assets, investments or long-lived assets could result in an impairment and a non-cash charge would be required. Any such charge could be material to the Companys reported net earnings.
Fluctuations in Foreign Exchange Rates Could Have an Adverse Effect on the Companys Results of Operations.
The Company has significant operations in a number of foreign jurisdictions and certain of the Company operations are conducted in foreign currencies. The value of these currencies fluctuate relative to the U.S. dollar. As a result, the Company is exposed to exchange rate fluctuations, which could have an adverse effect on its results of operations in a given period or in specific markets.
The Loss of Carriage Agreements Could Cause the Companys Revenue and Operating Results to Decline Significantly in any Given Period or in Specific Markets.
The Company is dependent upon the maintenance of affiliation agreements with third party owned television stations and there can be no assurance that these affiliation agreements will be renewed in the future on terms acceptable to the Company. The loss of a significant number of these affiliation arrangements could reduce the distribution of FOX and MyNetworkTV and adversely affect the Companys ability to sell national and local advertising time. Similarly, the Companys cable networks maintain affiliation and carriage arrangements that enable them to reach a large percentage of cable and direct broadcast satellite households across the United States. The loss of a significant number of these arrangements or the loss of carriage on basic programming tiers could reduce the distribution of the Companys cable networks, which may adversely affect those networks revenues from subscriber fees and their ability to sell national and local advertising time.
The Inability to Renew Sports Programming Rights Could Cause the Companys Advertising Revenue to Decline Significantly in any Given Period or in Specific Markets.
The sports rights contracts between the Company, on the one hand, and various professional sports leagues and teams, on the other, have varying duration and renewal terms. As these contracts expire, renewals on favorable terms may be sought; however, third parties may outbid the current rights holders for the rights contracts. In addition, professional sports leagues or teams may create their own networks or the renewal costs could substantially exceed the original contract cost. The loss of rights could impact the extent of the sports coverage offered by the Company and its affiliates, as it relates to FOX, and could adversely affect the Companys advertising and affiliate revenues. Upon renewal, the Companys results could be adversely affected if escalations in sports programming rights costs are unmatched by increases in advertising rates and, in the case of cable networks, subscriber fees.
Technological Developments May Increase the Threat of Content Piracy and Signal Theft and Limit the Companys Ability to Protect Its Intellectual Property Rights.
The Company seeks to limit the threat of content piracy and DBS programming signal theft; however, policing unauthorized use of the Companys products and services and related intellectual property is often difficult and the steps taken by the Company may not in every case prevent the infringement by unauthorized third parties. Developments in technology, including digital copying, file compressing and the growing penetration of high-bandwidth Internet connections, increase the threat of content piracy by making it easier to duplicate and widely distribute pirated material. In addition, developments in software or devices that circumvent encryption technology increase the threat of unauthorized use and distribution of DBS programming signals. The Company has taken, and will continue to take, a variety of actions to combat piracy and signal theft, both individually and, in some instances, together with industry associations. There can be no assurance that the Companys efforts to enforce its rights and protect its products, services and intellectual property will be
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successful in preventing content piracy or signal theft. Content piracy and signal theft present a threat to the Companys revenues from products and services, including, but not limited to, films, television shows, books and DBS programming.
Labor Disputes May Have an Adverse Effect on the Companys Business.
In a variety of the Companys businesses, the Company and its partners engage the services of writers, directors, actors and other talent, trade employees and others who are subject to collective bargaining agreements, including employees of the Companys film and television studio operations and newspapers. If the Company or its partners are unable to renew expiring collective bargaining agreements, it is possible that the affected unions could take action in the form of strikes or work stoppages. Such actions, as well as higher costs in connection with these collective bargaining agreements or a significant labor dispute could have an adverse effect on the Companys business by causing delays in production or by reducing profit margins.
Changes in U.S. or Foreign Regulations May Have an Adverse Effect on the Companys Business.
The Company is subject to a variety of U.S. and foreign regulations in the jurisdictions in which its businesses operate. In general, the television broadcasting and multichannel video programming and distribution industries in the United States are highly regulated by federal laws and regulations issued and administered by various federal agencies, including the FCC. The FCC generally regulates, among other things, the ownership of media, broadcast and multichannel video programming and technical operations of broadcast and satellite licensees. Further, the United States Congress and the FCC currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters, including technological changes, which could, directly or indirectly, affect the operations and ownership of the Companys U.S. media properties. Similarly, changes in regulations imposed by governments in other jurisdictions in which the Company, or entities in which the Company has an interest, operate could adversely affect its business and results of operations.
In addition, changes in tax regulations in the U.S. and other jurisdictions in which the Company has operations could affect the Companys results of operations.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
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ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Company held its Annual Meeting of Stockholders (the Annual Meeting) on October 16, 2009. A brief description of the matters voted upon at the Annual Meeting and the results of the voting on such matters is set forth below.
Proposal 1: The following individuals were elected as Directors:
Name |
For | Withheld | ||
José María Aznar |
669,116,150 | 3,245,149 | ||
Natalie Bancroft |
627,075,152 | 45,526,034 | ||
Peter L. Barnes |
670,935,434 | 1,426,066 | ||
Chase Carey |
669,900,207 | 2,462,796 | ||
Kenneth E. Cowley |
647,662,270 | 24,699,620 | ||
David F. DeVoe |
624,329,092 | 47,999,391 | ||
Viet Dinh |
508,202,864 | 164,127,464 | ||
Sir Roderick I. Eddington |
494,775,002 | 177,553,430 | ||
Mark Hurd |
668,551,198 | 3,784,601 | ||
Andrew S.B. Knight |
498,309,655 | 174,017,575 | ||
James R. Murdoch |
659,266,008 | 12,258,046 | ||
K. Rupert Murdoch |
661,194,779 | 11,169,820 | ||
Lachlan K. Murdoch |
665,581,608 | 16,782,991 | ||
Thomas J. Perkins |
498,222,403 | 174,104,180 | ||
Arthur M. Siskind |
659,687,889 | 12,665,560 | ||
John L. Thornton |
507,721,893 | 164,002,492 |
Proposal 2: A proposal to ratify the selection of Ernst & Young LLP as the Companys independent registered public accounting firm for the fiscal year ending June 30, 2010 was voted upon as follows:
For: |
670,148,616 | |
Against: |
519,433 | |
Abstain: |
1,700,860 |
ITEM 5. | OTHER INFORMATION |
Not applicable.
ITEM 6. | EXHIBITS |
(a) | Exhibits. |
12.1 | Ratio of Earnings to Fixed Charges.* | |
31.1 | Chairman and Chief Executive Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.* | |
31.2 | Chief Financial Officer Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.* | |
32.1 | Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002.* | |
101 | The following financial information from the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2009 formatted in eXtensible Business Reporting Language: (i) Unaudited Consolidated Statements of Operations for the three and six months ended December 31, 2009 and 2008; (ii) Unaudited Consolidated Balance Sheets at December 31, 2009 and June 30, 2009; (iii) Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2009 and 2008; and (iv) Notes to the Unaudited Consolidated Financial Statements (tagged as blocks of text).* |
* | Filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEWS CORPORATION | ||
(Registrant) | ||
By: | /s/ DAVID F. DEVOE | |
David F. DeVoe Senior Executive Vice President and Chief Financial Officer |
Date: February 3, 2010
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