TIDMNCRA
RNS Number : 5017E
News Corporation
10 May 2013
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 March 31, 2013
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1211 Avenue of the Americas, New York, 10036
New York
(Address of Principal Executive Offices) (Zip Code)
Registrant's 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 May 6, 2013, 1,516,022,059 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
NEWS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
-----
Part I. Financial Information
Item
1. Financial Statements
Unaudited Consolidated Statements of Operations for the three
and nine months ended March 31, 2013 and 2012 3
Unaudited Consolidated Statements of Comprehensive Income for
the three and nine months ended March 31, 2013 and 2012 4
Consolidated Balance Sheets at March 31, 2013 (unaudited) and
June 30, 2012 (audited) 5
Unaudited Consolidated Statements of Cash Flows for the nine
months ended March 31, 2013 and 2012 6
Notes to the Unaudited Consolidated Financial Statements 7
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations 47
Item
3. Quantitative and Qualitative Disclosures About Market Risk 65
Item
4. Controls and Procedures 66
Part II. Other Information
Item
1. Legal Proceedings 67
Item
1A. Risk Factors 72
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds 79
Item
3. Defaults Upon Senior Securities 79
Item
4. Mine Safety Disclosures 79
Item
5. Other Information 79
Item
6. Exhibits 80
Signature 81
2
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NEWS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
For the three
months For the nine months
ended March 31, ended March 31,
-------------------- -----------------------
2013 2012 2013 2012
---------- ------- ------------ --------
Revenues $ 9,538 $ 8,402 $ 27,099 $ 25,336
Operating expenses (6,114) (5,216) (16,831) (15,552)
Selling, general and administrative (1,705) (1,580) (4,981) (4,721)
Depreciation and amortization (357) (294) (967) (869)
Impairment and restructuring charges (56) (27) (273) (154)
Equity earnings of affiliates 157 204 521 467
Interest expense, net (276) (258) (809) (773)
Interest income 32 26 100 91
Other, net 2,431 27 5,206 22
Income before income tax expense 3,650 1,284 9,065 3,847
Income tax expense (741) (281) (1,402) (931)
Net Income 2,909 1,003 7,663 2,916
Less: Net income attributable to noncontrolling
interests (55) (66) (195) (184)
Net income attributable to News Corporation
stockholders $ 2,854 $ 937 $ 7,468 $ 2,732
Weighted average shares:
Basic 2,324 2,468 2,344 2,527
Diluted 2,330 2,475 2,348 2,534
Net income attributable to News Corporation
stockholders per share:
Basic $ 1.23 $ 0.38 $ 3.19 $ 1.08
Diluted $ 1.22 $ 0.38 $ 3.18 $ 1.08
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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NEWS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
For the three For the nine
months months
ended March ended March
31, 31,
--------------- ---------------
2013 2012 2013 2012
------ ------ ------ ------
Net income $2,909 $1,003 $7,663 $2,916
Other comprehensive (loss) income:
Foreign currency translation adjustments (433) 361 (152) (659)
Unrealized holding (losses) gains on securities (27) 53 (25) (30)
Benefit plan adjustments 13 - 41 18
Other comprehensive (loss) income (447) 414 (136) (671)
Comprehensive income 2,462 1,417 7,527 2,245
Less: Net income attributable to noncontrolling
interests (a) (55) (66) (195) (184)
Less: Other comprehensive income attributable
to noncontrolling interests - - (2) 4
Comprehensive income attributable to News Corporation
stockholders $2,407 $1,351 $7,330 $2,065
(a) Net income attributable to noncontrolling interests includes $26 million
and $21 million for the three months ended March 31, 2013 and 2012, respectively,
and $74 million and $55 million for the nine months ended March 31, 2013
and 2012, respectively, relating to redeemable noncontrolling interests.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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NEWS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
As of March As of June
31, 30,
2013 2012
------------- ------------
(unaudited) (audited)
Assets:
Current assets:
Cash and cash equivalents $ 9,324 $ 9,626
Receivables, net 7,136 6,608
Inventories, net 3,476 2,595
Other 857 619
Total current assets 20,793 19,448
Non-current assets:
Receivables 431 387
Investments 6,622 4,968
Inventories, net 5,002 4,596
Property, plant and equipment, net 5,984 5,814
Intangible assets, net 8,331 7,133
Goodwill 20,139 13,174
Other non-current assets 1,188 1,143
Total assets $ 68,490 $ 56,663
Liabilities and Equity:
Current liabilities:
Borrowings $ 157 $ 273
Accounts payable, accrued expenses and other current
liabilities 6,030 5,405
Participations, residuals and royalties payable 1,915 1,691
Program rights payable 1,776 1,368
Deferred revenue 1,175 880
Total current liabilities 11,053 9,617
Non-current liabilities:
Borrowings 16,317 15,182
Other liabilities 4,279 3,650
Deferred income taxes 2,947 2,388
Redeemable noncontrolling interests 645 641
Commitments and contingencies
Equity:
Class A common stock (a) 15 15
Class B common stock (b) 8 8
Additional paid-in capital 15,902 16,140
Retained earnings and accumulated other comprehensive
income 14,139 8,521
Total News Corporation stockholders' equity 30,064 24,684
Noncontrolling interests 3,185 501
Total equity 33,249 25,185
Total liabilities and equity $ 68,490 $ 56,663
(a) Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized,
1,521,003,250 shares and 1,584,519,372 shares issued and outstanding, net
of 1,775,907,212 and 1,775,983,637 treasury shares at par at March 31, 2013
and June 30, 2012, respectively.
(b) 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 March 31, 2013 and June 30, 2012, respectively.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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NEWS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
For the nine months
ended
March 31,
-----------------------
2013 2012
------------ --------
Operating activities:
Net income $ 7,663 $ 2,916
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 967 869
Amortization of cable distribution investments 67 69
Equity earnings of affiliates (521) (467)
Cash distributions received from affiliates 311 313
Impairment charges 35 10
Other, net (5,206) (22)
Change in operating assets and liabilities, net of acquisitions:
Receivables and other assets (295) (551)
Inventories, net (1,043) (577)
Accounts payable and other liabilities 785 161
Net cash provided by operating activities 2,763 2,721
Investing activities:
Property, plant and equipment, net of acquisitions (627) (651)
Acquisitions, net of cash acquired (2,746) (532)
Investments in equity affiliates (618) (14)
Other investments (63) (198)
Proceeds from dispositions 2,670 408
Net cash used in investing activities (1,384) (987)
Financing activities:
Borrowings 1,277 -
Repayment of borrowings (989) (32)
Issuance of shares 170 87
Repurchase of shares (1,834) (3,294)
Dividends paid (384) (323)
Purchase of subsidiary shares from noncontrolling interests (9) -
Other, net 70 -
Net cash used in financing activities (1,699) (3,562)
Net decrease in cash and cash equivalents (320) (1,828)
Cash and cash equivalents, beginning of year 9,626 12,680
Exchange movement on opening cash balance 18 (166)
Cash and cash equivalents, end of year $ 9,324 $ 10,686
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS 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
six segments: Cable Network Programming, Filmed Entertainment,
Television, Direct Broadcast Satellite Television, 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,
2013.
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
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2012 as filed with the Securities and Exchange Commission
("SEC") on August 14, 2012 and as amended on October 1, 2012 (the
"2012 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 investment's fair value is not readily
determinable, the Company accounts for its investment under the
cost method.
The Company evaluates whether a News Corporation entity or
interest is a variable interest entity ("VIE") and whether the
Company is the primary beneficiary. Consolidation is required if
both of these criteria are met. The Company's majority owned
subsidiary, Sky Deutschland AG ("Sky Deutschland") is considered a
VIE. (See Note 6-Investments)
The Company owns a 34% interest in Hulu LLC ("Hulu") which is
considered a VIE. The Company's risk of loss related to this
investment is $115 million, the portion of Hulu's debt that it
guarantees. (See Note 13-Commitments and Contingencies)
The Company also has an investment in a VIE that it
consolidates; however, the assets, liabilities, net income and cash
flows attributable to this entity were not material to the Company
in any of the periods presented.
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.
The Company's fiscal year ends on the Sunday closest to June 30.
Fiscal 2013 and fiscal 2012 include 52 weeks. All references to
March 31, 2013 and March 31, 2012 relate to the three and nine
months ended March 31, 2013 and April 1, 2012, respectively. For
convenience purposes, the Company continues to date its financial
statements as of March 31.
Certain fiscal 2012 amounts have been reclassified to conform to
the fiscal 2013 presentation.
Recently Adopted and Recently Issued Accounting Guidance
Adopted
In the first quarter of fiscal 2013, the Company adopted
Accounting Standards Update ("ASU") 2011-05, "Comprehensive Income
(Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05")
which requires an entity to present total comprehensive income, the
components of net income and the components of other comprehensive
income in either a single continuous statement of comprehensive
income or in two separate but consecutive statements. The adoption
of ASU 2011-05 resulted in two separate but consecutive
statements.
In the first quarter of fiscal 2013, the Company adopted ASU
2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing
Goodwill for Impairment" ("ASU 2011-08"). Under ASU 2011-08 the
Company has the option to make a qualitative assessment of
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
whether it is more likely than not that a reporting unit's fair
value is less than its carrying value before applying the two-step
goodwill impairment model that is currently in place. If it is
determined through the qualitative assessment that a reporting
unit's fair value is more likely than not greater than its carrying
value, the remaining impairment steps would be unnecessary.
In the second quarter of fiscal 2013, the Company adopted ASU
2012-07, "Accounting for Fair Value Information That Arises after
the Measurement Date and Its Inclusion in the Impairment Analysis
of Unamortized Film Costs" ("ASU 2012-07"), which would have the
effect of incorporating into the fair value measurement used for
the impairment analysis of unamortized film costs only information
that is known or knowable as of the measurement date, consistent
with how information is incorporated into other fair value
measurements. ASU 2012-07 is effective for the Company for
impairment assessments performed on or after December 15, 2012.
Prospective application of ASU 2012-07 had no effect on the
consolidated financial statements of the Company for the current
periods presented.
Issued
In July 2012, the Financial Accounting Standards Board ("FASB")
issued ASU 2012-02, "Intangibles-Goodwill and Other (Topic 350):
Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU
2012-02"), which permits an entity to make a qualitative assessment
of whether it is more likely than not that the fair value of a
reporting unit's indefinite-lived intangible asset is less than the
asset's carrying value before applying a quantitative impairment
assessment. If it is determined through the qualitative assessment
that the fair value of a reporting unit's indefinite-lived
intangible asset is more likely than not greater than the asset's
carrying value, the remaining impairment steps would be
unnecessary. The qualitative assessment is optional, allowing
companies to go directly to the quantitative assessment. ASU
2012-02 is effective for the Company for annual and interim
indefinite-lived intangible asset impairment tests performed
beginning July 1, 2013, however, early adoption is permitted. The
Company is currently evaluating the impact ASU 2012-02 will have on
its consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, "Comprehensive
Income (Topic 220): Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income" ("ASU 2013-02"), which
requires the Company to provide information about the amounts
reclassified out of accumulated other comprehensive income by
component. In addition, it requires the Company to present, either
on the face of the statement where net income is presented or in
the notes, significant amounts reclassified out of accumulated
other comprehensive income by the respective line items of net
income but only if the amount reclassified is required under U.S.
GAAP to be reclassified to net income in its entirety in the same
reporting period. For other amounts that are not required under
U.S. GAAP to be reclassified in their entirety to net income, the
Company is required to cross-reference to other disclosures
required under U.S. GAAP that provide additional detail about those
amounts. ASU 2013-02 is effective for the Company for interim
reporting periods beginning July 1, 2013, however, early adoption
is permitted. The Company is currently evaluating the impact ASU
2013-02 will have on its consolidated financial statements.
In February 2013, the FASB issued ASU 2013-04, "Liabilities
(Topic 405): Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation Is Fixed
at the Reporting Date" ("ASU 2013-04"). The objective of ASU
2013-04 is to provide guidance for the recognition, measurement,
and disclosure of obligations resulting from joint and several
liability arrangements for which the total amount of the obligation
(within the scope of this guidance) is fixed at the reporting date.
Examples of obligations within the scope of ASU 2013-04 include
debt arrangements, other contractual obligations, and settled
litigation and judicial rulings. ASU 2013-04 is effective for the
Company for interim reporting periods beginning July 1, 2014,
however, early adoption is permitted. The Company is currently
evaluating the impact ASU 2013-04 will have on its consolidated
financial statements.
In March 2013, the FASB issued ASU 2013-05, "Parent's Accounting
for the Cumulative Translation Adjustment upon Derecognition of
Certain Subsidiaries or Groups of Assets within a Foreign Entity or
of an Investment in a Foreign Entity," ("ASU 2013-05"). The
objective of ASU 2013-05 is to resolve the diversity in practice
regarding the release of the cumulative translation adjustment into
net income when a parent either sells a part or all of its
investment in a foreign entity or no longer holds a controlling
financial interest in a subsidiary or group of assets or a business
within a foreign entity. ASU 2013-05 is effective for the Company
for interim reporting periods beginning July 1, 2014, however,
early adoption is permitted. The Company is currently evaluating
the impact ASU 2013-05 will have on its consolidated financial
statements.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS
Fiscal 2013
Acquisitions
During the nine months ended March 31, 2013, the Company
completed a number of acquisitions as more fully described below.
All of the Company's acquisitions were accounted for under
Accounting Standards Codification ("ASC") 805, "Business
Combinations" ("ASC 805"), which requires, among other things, that
an acquirer (i) remeasure any previously held equity interest in an
acquiree at its acquisition date fair value and recognize any
resulting gains or losses in earnings and (ii) record any
non-controlling interests in an acquiree at their acquisition date
fair values. Accordingly, several of the transactions described
below resulted in the recognition of remeasurement gains since the
Company acquired control of an acquiree in stages. Further, other
transactions described below involved the Company acquiring control
with an ownership stake of less than 100%. In those instances, the
allocation of the excess purchase price reflects 100% of the fair
value of the acquiree with the non-controlling interests recorded
at fair value.
The below acquisitions all support the Company's strategic
priority of increasing its brand presence and reach in key
international and domestic markets, acquiring greater control of
investments that complement its portfolio of businesses and
creating new pay-TV sports franchises. For those acquisitions where
the allocation of the excess purchase price is not final, the
amounts allocated to intangibles and goodwill, the estimates of
useful lives and the related amortization expense are subject to
change pending the completion of final valuations of certain assets
and liabilities. A change in the purchase price allocations and any
estimates of useful lives could result in a change in the value
allocated to the intangible assets that could impact future
amortization expense.
For the nine months ended March 31, 2013, the below acquisitions
contributed $935 million in revenues and $85 million in Segment
operating income in the Company's unaudited consolidated results of
operations.
Thomas Nelson
In July 2012, the Company acquired Thomas Nelson, Inc. ("Thomas
Nelson"), one of the leading Christian book publishers in the U.S.,
for approximately $200 million in cash. The acquisition of Thomas
Nelson increased the Company's presence and reach in the Christian
publishing market. In accordance with ASC 350,
"Intangibles-Goodwill and Other," ("ASC 350") the excess purchase
price of approximately $160 million has been preliminarily
allocated as follows: $65 million to publishing rights with a
useful life of 20 years, $25 million to imprints which have an
indefinite life and approximately $70 million representing the
goodwill on the transaction.
Eredivisie Media & Marketing
In November 2012, the Company acquired a controlling 51%
ownership stake in Eredivisie Media & Marketing CV ("EMM") for
approximately $350 million, of which $325 million was cash and $25
million was contingent consideration. EMM is a media company that
holds the collective media and sponsorship rights of the Dutch
Premier League. The remaining 49% of EMM, which is owned by the
Dutch Premier League and the global TV production company Endemol,
has been recorded at its acquisition date fair value. In accordance
with ASC 350, the excess purchase price, based on a valuation of
100% of EMM, of approximately $660 million has been preliminarily
allocated as follows: $275 million to amortizable intangible
assets, primarily customer relationships, with useful lives ranging
from 6 to 20 years, $45 million to trade names which have an
indefinite life and approximately $340 million representing the
goodwill on the transaction.
Fox Sports Asia (formerly ESPN Star Sports)
In November 2012, the Company acquired the remaining 50%
interest in Fox Sports Asia (formerly ESPN STAR Sports) that it did
not already own for approximately $220 million, net of cash
acquired. Fox Sports Asia is a leading sports broadcaster in Asia
and the Company now, through its wholly owned subsidiaries, owns
100% of Fox Sports Asia. The carrying amount of the Company's
previously held equity interest in Fox Sports Asia was revalued to
fair value as of the acquisition date, resulting in a non-taxable
gain of approximately $174 million which was included in Other, net
in the unaudited consolidated statements of operations for the nine
months ended March 31, 2013. In accordance with ASC 350, the
aggregate excess purchase price, including the revalued previously
held investment, of approximately $595 million has been
preliminarily allocated as follows: $120 million to amortizable
intangible assets, primarily MSO agreements, with useful lives
ranging from 8 to 15 years and approximately $475 million
representing the goodwill on the transaction.
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Media Holdings
In November 2012, the Company acquired Consolidated Media
Holdings Ltd. ("CMH"), a media investment company that operates in
Australia, for approximately $2 billion in cash and assumed debt of
approximately $235 million. CMH owned a 25% interest in Foxtel
through its 50% interest in FOX SPORTS Australia. The remaining 50%
of Foxtel is owned by Telstra Corporation Limited, one of
Australia's leading telecommunications companies. The acquisition
doubled the Company's stakes in FOX SPORTS Australia and Foxtel to
100% and 50%, respectively. Accordingly, the results of FOX SPORTS
Australia are included in the Company's unaudited consolidated
results of operations beginning in November 2012. Prior to November
2012, the Company accounted for its investment in FOX SPORTS
Australia under the equity method of accounting. The Company's
investment in Foxtel continues to be accounted for under the equity
method of accounting.
The carrying amount of the Company's previously held equity
interest in FOX SPORTS Australia, through which the Company held
its indirect 25% interest in Foxtel, was revalued to fair value as
of the acquisition date, resulting in a non-taxable gain of
approximately $1.2 billion which was included in Other, net in the
unaudited consolidated statements of operations for the nine months
ended March 31, 2013. The fair value of our previously held equity
interest of $1.6 billion was determined using an income approach
(discounted cash flow analysis) adjusted to remove an assumed
control premium. Significant unobservable inputs utilized in the
income approach valuation method were discount rates ranging from
9.5% to 10.5%, based on weighted average cost of capital for FOX
SPORTS Australia and Foxtel using the capital asset pricing model,
and long-term growth rates of approximately 2.5%, reflecting our
assessment of the long-term inflation rate for Australia. In
accordance with ASC 350, the excess purchase price, including the
revalued previously held investment, of approximately $3.1 billion
has been preliminarily allocated as follows: $1.8 billion to equity
method investments, approximately $685 million to amortizable
intangible assets, primarily customer relationships, with useful
lives ranging from 15 to 25 years, $100 million to trade names
which have an indefinite life and approximately $515 million
representing the goodwill on the transaction.
SportsTime Ohio
In December 2012, the Company acquired SportsTime Ohio, a
Regional Sports Network ("RSN") serving the Cleveland, Ohio market,
for an estimated total purchase price, including post-closing
costs, of approximately $285 million, of which $135 million was in
cash. The balance of the purchase price represents the fair value
of deferred payments and payments that are contingent upon
achievement of certain performance objectives. In accordance with
ASC 350, the excess purchase price of approximately $275 million
has been preliminarily allocated as follows: $135 million to
amortizable intangible assets, primarily MSO agreements, with
useful lives ranging from 8 to 20 years and approximately $140
million representing the goodwill on the transaction.
Sky Deutschland
During the third quarter of fiscal 2013, the Company obtained
the power to control Sky Deutschland through the acquisition of an
additional 5% ownership interest that increased the Company's
ownership interest to 55%. The remaining 45% non-controlling
interests in Sky Deutschland have been recorded at fair value,
based on the closing price of its shares on the Frankfurt Stock
Exchange on the date control was acquired. The carrying amount of
the Company's previously held equity interest in Sky Deutschland
was revalued to fair value as of the acquisition date, resulting in
a gain of approximately $2.1 billion which was included in Other,
net in the unaudited consolidated statements of operations for the
three and nine months ended March 31, 2013. In accordance with ASC
350, the aggregate excess purchase price, including the revalued
previously held investment, of $5.4 billion has been preliminarily
allocated to goodwill and is not being amortized. Due to the
limited time since the acquisition date the initial accounting for
the business combination is incomplete at this time. As a result,
we are unable to provide amounts recognized as of the acquisition
date for major classes of assets. The results of Sky Deutschland
are included in the Company's unaudited consolidated results of
operations beginning in January 2013. (See Note 6-Investments)
Other
In July 2011, the Company announced that it would close its
publication, The News of the World , after allegations of phone
hacking and payments to public officials. As a result of
management's approval of the shutdown of The News of the World ,
the Company has reorganized portions of the U.K. newspaper business
and has recorded restructuring charges in fiscal 2013 and 2012
primarily for termination benefits and certain organizational
restructuring at the U.K. newspapers. (See Note 4-Restructuring
Programs) The Company is subject to several ongoing investigations
by U.K. and U.S. regulators and governmental authorities relating
to phone hacking, illegal data access and inappropriate payments to
officials at The News of the World and The Sun and related matters
(the "U.K. Newspaper Matters"). The Company is cooperating with
these investigations. In addition, the Company has admitted
liability in many civil cases related to the phone hacking
allegations and has settled many cases. The Company created an
independently-chaired Management & Standards Committee (the
"MSC"), which operates independently from NI Group Limited ("News
International") and
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
has full authority to ensure cooperation with all relevant
investigations and inquiries into the U.K. Newspaper Matters and
all other related issues. The MSC conducts its own internal
investigation where appropriate. The MSC has an independent
Chairman, Lord Grabiner QC, and reports directly to Gerson
Zweifach, Senior Executive Vice President and Group General Counsel
of the Company. Mr. Zweifach reports to the independent members of
the Board of Directors (the "Board") through their representative
Viet Dinh, an independent director and Chairman of the Company's
Nominating and Corporate Governance Committee. The independent
directors of the Board have retained independent outside counsel
and are actively engaged in these matters. The MSC conducted an
internal investigation of the three other titles at NI Group
Limited ("News International") and engaged independent outside
counsel to advise it on these investigations and all other matters
it handles. As a result of these matters, News International has
instituted governance reforms and issued certain enhanced policies
to its employees. (See Note 13-Commitments and Contingencies for a
summary of the costs of The News of the World Investigations and
Litigation.)
In May 2012, the Company renewed its existing FOX affiliation
agreement with a major FOX affiliate group ("Network Affiliate").
As part of the transaction, the Company received a one-time payment
of $25 million and an option to buy Network Affiliate's stations in
any three of four markets or, if such option is not exercised,
receive an additional $25 million cash payment. Further, Network
Affiliate has an option to buy the Company's Baltimore station. The
Company decided not to exercise its option and the option expired
in March 2013. As a result, the Company received the additional $25
million cash payment in April 2013. The Company is amortizing the
$50 million received from the Network Affiliate over the term of
the affiliation agreement. Network Affiliate exercised its option
to purchase the Baltimore station and the Company recognized a loss
of approximately $90 million which was included in Other, net in
the unaudited consolidated statements of operations for the nine
months ended March 31, 2013.
On June 28, 2012, the Company announced its intent to pursue the
separation of its business into two separate independent public
companies, one of which will hold the Company's global media and
entertainment businesses and the other, New Newscorp LLC ("New News
Corporation"), which will hold the businesses comprising the
Company's newspapers, information services and integrated marketing
services, digital real estate services, book publishing, digital
education and sports programming and pay-TV distribution in
Australia. The Company has announced that it intends to change its
name to Twenty-First Century Fox, Inc. ("21st Century Fox") after
the separation, subject to stockholder approval and other
conditions to the separation. On December 4, 2012, the Company's
board of directors authorized management to proceed with the
proposed distribution, subject to the satisfaction or waiver of
certain conditions and the board of directors' ongoing
consideration of the transaction and its final approval, which may
not be granted.
To effect the distribution, the Company will first undertake an
internal reorganization. Following the internal reorganization, the
Company will distribute all of the shares of New News Corporation's
common stock to its stockholders on a pro rata basis. After the
distribution, the Company will not own any equity interest in New
News Corporation, and New News Corporation will operate
independently from the Company.
In connection with the separation, on December 21, 2012, New
News Corporation filed with the SEC an initial Form 10 registration
statement, which has been amended, and, on April 30, 2013, the
Company filed with the SEC a definitive proxy statement on Schedule
14A. The Company's stockholders will not be required to vote to
approve the distribution. However, in order to effectuate the
distribution in the manner discussed in the Form 10 registration
statement, the Company will be required to amend its Restated
Certificate of Incorporation, and the Company will hold a Special
Meeting on June 11, 2013 in connection therewith. The Company has
also applied for certain regulatory approvals and tax rulings
required to enable the separation to be completed as described.
There can be no assurances given that the separation of the
Company's businesses as described will occur.
At the end of fiscal 2012, the Company identified certain
businesses as held for sale and reclassified the net assets to
other current assets. During the nine months ended March 31, 2013,
as a result of revised projections, the Company recorded a non-cash
impairment charge of $35 million related to its assets held for
sale to reduce the carrying value of these assets to fair value
less cost to sell. The assets, liabilities and cash flows
attributable to these businesses were not material to the Company
in any of the periods presented and, accordingly, have not been
presented separately.
Fiscal 2012
Acquisitions
In December 2011, the Company acquired the 67% equity interest
it did not already own in Fox Pan American Sports LLC ("FPAS") for
approximately $400 million. FPAS, an international sports
programming and production entity, which owns and operates Fox
Sports Latin America network, a Spanish and Portuguese-language
sports network distributed to subscribers in certain Caribbean
and
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Central and South American nations, and partially through its
ownership in FPAS, a 53% interest in Fox Deportes, a
Spanish-language sports programming service distributed in the
United States. As a result of this transaction, the Company now
owns 100% of FPAS and Fox Deportes. Accordingly, the Company
changed its accounting for FPAS from an equity method investment to
a consolidated subsidiary beginning in December 2011. The
acquisition of FPAS supports the Company's strategic priority of
increasing its brand presence and reach in key international
markets.
The FPAS acquisition was accounted for in accordance with ASC
805. The carrying amount of the Company's previously held equity
interest in FPAS was revalued to fair value at the acquisition
date, resulting in a non-taxable gain of approximately $158 million
which was included in Other, net in the unaudited consolidated
statements of operations for the nine months ended March 31,
2012.
The Company finalized the purchase accounting for FPAS in the
second quarter of fiscal 2013 with approximately $280 million
allocated to finite-lived intangible assets with useful lives
ranging from 5 to 15 years and approximately $320 million allocated
to goodwill which will not be amortized. The goodwill reflects the
synergies and increased market penetration expected from combining
the operations of FPAS and the Company.
In May 2012, the Company acquired an approximate 23% interest in
Latin America Pay Television ("LAPTV"), a partnership that
distributes premium and basic television channels in Latin America,
for approximately $64 million in cash. As a result of this
transaction, the Company increased its interest in LAPTV to
approximately 78% from the 55% it owned as of June 30, 2011.
Disposals
In July 2011, the Company sold its majority interest in its
outdoor advertising businesses in Russia and Romania ("News Outdoor
Russia") for cash consideration of approximately $360 million. In
connection with the sale, the Company repaid $32 million of News
Outdoor Russia debt. (See Note 9-Borrowings) The Company recorded a
gain related to the sale of this business, which was included in
Other, net in the unaudited consolidated statements of operations
for the nine months ended March 31, 2012. The gain on the sale and
the net income, assets, liabilities and cash flow attributable to
the News Outdoor Russia operations were not material to the Company
in any of the periods presented and, accordingly, have not been
presented separately.
In May 2012, the Company sold its former U.K. newspaper division
headquarters located in East London, which it relocated from in
August 2010, for consideration of approximately GBP150 million
(approximately $235 million), of which GBP25 million (approximately
$39 million) was received on closing of the sale. The remaining
GBP125 million (approximately $196 million) is in the form of a
secured note and the Company will receive GBP25 million
(approximately $39 million) on May 31, 2013, and annually
thereafter until May 31, 2017. The Company recorded a loss of
approximately $22 million on this transaction, which was included
in Other, net in the consolidated statements of operations for the
fiscal year ended June 30, 2012.
Other
In fiscal 2012, the Company entered into an asset acquisition
agreement with a third party in exchange for a noncontrolling
ownership interest in one of the Company's majority-owned RSN. The
noncontrolling shareholder has a put option related to its
ownership interest that is exercisable beginning in fiscal 2015.
Since redemption of the noncontrolling interest is outside of the
control of the Company, the Company has accounted for this put
option in accordance with ASC 480-10-S99-3A, "Distinguishing
Liabilities from Equity" ("ASC 480-10-S99-3A"), and has recorded
the put option at its fair value as a redeemable noncontrolling
interest in the consolidated balance sheets.
NOTE 3. RECEIVABLES, NET
Receivables are presented net of an allowance for returns and
doubtful accounts, which is an estimate of amounts that may not be
collectible. In determining the allowance for returns, management
analyzes historical returns, current economic trends and changes in
customer demand and acceptance of the Company's products. Based on
this information, management reserves a percentage of each dollar
of product sales that provide the customer with the right of
return. The allowance for doubtful accounts is estimated based on
historical experience, receivable aging, current economic trends
and specific identification of certain receivables that are at risk
of not being paid.
The Company has receivables with original maturities greater
than one year in duration principally related to the Company's sale
of program rights in the television syndication markets within the
Filmed Entertainment segment. Allowances for credit losses are
established against these non-current receivables as necessary. As
of March 31, 2013 and June 30, 2012, these allowances were not
material.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Receivables, net consisted of:
As of As of
March June
31, 30,
2013 2012
------- -------
(in millions)
Total receivables $ 8,736 $ 7,981
Allowances for returns and doubtful accounts (1,169) (986)
Total receivables, net 7,567 6,995
Less: current receivables, net (7,136) (6,608)
Non-current receivables, net $ 431 $ 387
NOTE 4. RESTRUCTURING PROGRAMS
Fiscal 2013
The Company recorded restructuring charges of $56 million and
$238 million in the three and nine months ended March 31, 2013,
respectively, of which $52 million and $227 million, respectively,
related to the newspaper businesses. The restructuring charges
primarily relate to the reorganization of the Australian newspaper
businesses which was announced at the end of fiscal 2012 and the
continued reorganization of the U.K. newspaper business. The
restructuring charges recorded are primarily for termination
benefits in Australia and contract termination payments in the
U.K.
Fiscal 2012
The Company recorded restructuring charges of $17 million and
$144 million in the three and nine months ended March 31, 2012,
respectively, of which $12 million and $132 million, respectively,
related to the newspaper businesses. The Company reorganized
portions of the newspaper businesses and recorded restructuring
charges primarily for termination benefits as a result of the U.K.
Newspaper Matters, certain organizational restructurings at other
newspapers and the shutdown of a regional newspaper. As a result of
the shutdown of the regional newspaper, the Company wrote-off
associated intangible assets of approximately $10 million in the
three and nine months ended March 31, 2012.
Changes in the program liabilities were as follows:
For the three months ended March 31,
---------------------------------------------------------------------------------------------------
2013 2012
------------------------------------------------ ------------------------------------------------
One time Facility One time Facility
termination related Other termination related Other
benefits costs costs Total benefits costs costs Total
------------- ---------- ----- ----------- ------------- ---------- ----- -----------
(in millions)
Beginning
of period $ 38 $ 175 $ 3 $ 216 $ 59 $ 195 $ - $ 254
Additions 35 3 18 56 8 3 6 17
Payments (38) (8) (16) (62) (29) (9) (1) (39)
Other (1) - (4) (5) - - (4) (4)
End of
period $ 34 $ 170 $ 1 $ 205 $ 38 $ 189 $ 1 $ 228
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended March 31,
---------------------------------------------------------------------------------------------------
2013 2012
------------------------------------------------ ------------------------------------------------
One time Facility One time Facility
termination related Other termination related Other
benefits costs costs Total benefits costs costs Total
------------- ---------- ----- ----------- ------------- ---------- ----- -----------
(in millions)
Beginning
of period $ 64 $ 185 $ - $ 249 $ 27 $ 207 $ - $ 234
Additions 153 8 77 238 110 9 25 144
Payments (182) (23) (68) (273) (94) (27) (13) (134)
Other (1) - (8) (9) (5) - (11) (16)
End of
period $ 34 $ 170 $ 1 $ 205 $ 38 $ 189 $ 1 $ 228
The Company expects to record an additional $71 million of
restructuring charges, principally related to accretion on facility
termination obligations through fiscal 2021 and additional
termination benefits related to the newspaper businesses. As of
March 31, 2013, $65 million of the Company's accrued restructuring
liability was included in current liabilities and the balance was
included in long-term other liabilities. Amounts included in other
liabilities primarily relate to facility termination obligations,
which are expected to be paid through fiscal 2021.
NOTE 5. INVENTORIES
The Company's inventories were comprised of the following:
As of As of
March June
31, 30,
2013 2012
------- -------
(in millions)
Programming rights $ 5,302 $ 4,285
Books, DVDs, Blu-rays, paper and other merchandise 385 348
Filmed entertainment costs:
Films:
Released (including acquired film libraries) 616 846
Completed, not released 75 135
In production 711 502
In development or preproduction 234 140
1,636 1,623
Television productions:
Released (including acquired libraries) 727 561
In production 426 370
In development or preproduction 2 4
1,155 935
Total filmed entertainment costs, less accumulated amortization
(a) 2,791 2,558
Total inventories, net 8,478 7,191
Less: current portion of inventory, net (b) (3,476) (2,595)
Total noncurrent inventories, net $ 5,002 $ 4,596
(a) Does not include $374 million and $397 million of net intangible film library
costs as of March 31, 2013 and June 30, 2012, respectively, which are included
in intangible assets subject to amortization in the consolidated balance
sheets.
(b) Current inventory as of March 31, 2013 and June 30, 2012 is comprised of
programming rights ($3,120 million and $2,279 million, respectively), books,
DVDs, Blu-rays, paper and other merchandise.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INVESTMENTS
The Company's investments were comprised of the following:
Ownership
Percentage
As of As of As of
March March June
31, 31, 30,
2013 2013 2012
------------- --------- ------
(in millions)
Equity method
investments:
Foxtel (a) Australian pay-TV operator 50% $ 2,207 $ 205
British Sky
Broadcasting Group
plc (a) (b) U.K. DBS operator 39% 1,944 1,710
Yankees Entertainment
and Sports
Network Regional sports network 49% 830 -
SKY Network Television
Ltd. (a)
(c) New Zealand media company -% - 390
Sky Deutschland (d) German pay-TV operator 55% - 231
Digital technology
NDS Group Limited (e) company -% - 492
Other equity method investments various 447 699
Fair value of available-for-sale
investments various 305 561
Loan receivable from Foxtel N/A 462 227
Other investments various 427 453
Total Investments $ 6,622 $4,968
(a) For the nine months ended March 31, 2013 the Company received dividends of
$166 million from British Sky Broadcasting Group plc ("BSkyB"), $60 million
from SKY Network Television Ltd. and $57 million from Foxtel.
(b) The Company's investment in BSkyB had a market value of $8,492 million at
March 31, 2013 and was valued using the quoted market price.
(c) In March 2013, the Company sold its 44% investment in SKY Network Television
Ltd.
(d) In January 2013, the Company acquired, through a combination of a private
placement and a rights offering, additional shares of Sky Deutschland increasing
its ownership to approximately 55%. As a result of these transactions, the
Company has the power to control Sky Deutschland and the results of Sky Deutschland
are included in the Company's unaudited consolidated results of operations
beginning in January 2013.
(e) In July 2012, the Company sold its 49% investment in NDS Group Limited ("NDS").
Foxtel
In May 2012, Foxtel, a cable and satellite television service in
Australia, in which the Company at the time indirectly owned a 25%
interest, purchased Austar United Communications Ltd to create a
national subscription television service in Australia. The
transaction was funded by Foxtel bank debt and Foxtel's
shareholders made pro-rata capital contributions in the form of
subordinated shareholder notes based on their respective ownership
interest. The Company's share of the funding contribution was
approximately $230 million. The subordinated shareholder note has a
maximum term of 15 years, with interest payable on June 30 th each
year and at maturity. The subordinated shareholder note can be
repaid in 10 years provided that Foxtel's senior debt has been
repaid. Upon maturity, the principal advanced will be repayable. In
November 2012, the Company increased its investment in Foxtel to
50% from 25% through the acquisition of CMH which also held the
same subordinated shareholder note. Accordingly, the carrying value
of the shareholder note receivable from Foxtel doubled to $460
million. (See Note 2-Acquisitions, Disposals and Other
Transactions)
BSkyB
During fiscal 2010, the Company announced that it had proposed
to the board of directors of BSkyB, in which the Company currently
has an approximate 39% interest, to make a cash offer for the BSkyB
shares that the Company does not already own. On July 13, 2011, the
Company announced that it no longer intended to make an offer for
the BSkyB shares that the Company does not already own. As a result
of the July 2011 announcement, the Company paid BSkyB a termination
fee of approximately $63 million in accordance with a cooperation
agreement between the parties. The termination fee was reflected in
Other, net in the Company's unaudited consolidated statements of
operations for the nine months ended March 31, 2012.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In November 2011, BSkyB's shareholders and board of directors
authorized a share repurchase program and in November 2012 they
authorized an increase in the share repurchase program. The Company
entered into an agreement with BSkyB under which, following any
market purchases of shares by BSkyB, the Company will sell to BSkyB
sufficient shares to maintain its approximate 39% interest
subsequent to those market purchases, for a price equal to the
price paid by BSkyB in respect of the relevant market purchases.
BSkyB began repurchasing shares as part of this share repurchase
program during the second quarter of fiscal 2012. As a result,
during the three and nine months ended March 31, 2013, the Company
received cash consideration of approximately $14 million and $272
million, respectively, and recognized a gain of $11 million and
$217 million, respectively, which was included in Equity earnings
of affiliates in the Company's unaudited consolidated statements of
operations.
Yankees Entertainment and Sports Network
In December 2012, the Company acquired a 49% equity interest in
the Yankees Entertainment and Sports Network ("YES"), a RSN, for
approximately $584 million and simultaneous with the closing of
this transaction, the Company paid approximately $250 million of
upfront costs on behalf of YES. The Company's investment of
approximately $834 million is being allocated between tangible and
intangible assets in accordance with ASC 323, "Investments-Equity
Investments". The allocation of the excess cost is not final and is
subject to change upon completion of final valuations of certain
assets and liabilities. Changes in how the Company allocates excess
cost could reduce future equity earnings as a result of additional
amortization. In fiscal 2016, the remaining partners can exercise a
put option that would require the Company to acquire up to an
additional 31% interest. If the put option is not exercised, the
Company has a call option beginning in fiscal 2017 that would allow
the Company to acquire up to an additional 31% interest.
SKY Network Television Ltd.
In March 2013, the Company sold its 44% equity interest in SKY
Network Television Ltd. for approximately $675 million and recorded
a gain of approximately $321 million which was included in Other,
net in the unaudited consolidated statements of operations for the
three and nine months ended March 31, 2013.
Sky Deutschland
During the three months ended March 31, 2013, the Company
acquired, through a combination of a private placement and a rights
offering, approximately 92 million additional shares of Sky
Deutschland increasing its ownership to approximately 55%. The
aggregate cost of the shares acquired by the Company was
approximately EUR410 million (approximately $550 million). As a
result of these transactions, the Company has the power to control
Sky Deutschland and the results of Sky Deutschland are included in
the Company's unaudited consolidated results of operations
beginning in January 2013. Prior to the acquisition of the
additional shares, the Company accounted for its investment in Sky
Deutschland under the equity method of accounting and the Company's
investment consisted of common stock, convertible bonds and
loans.
In addition, the Company has guaranteed Sky Deutschland's new
EUR300 million (approximately $400 million) five-year bank credit
facility, of which approximately EUR225 million (approximately $290
million) has been utilized and is included in borrowings. In
connection with the consolidation of Sky Deutschland, the Company
assumed $480 million in bank debt, which Sky Deutschland repaid in
full during the three months ended March 31, 2013. Additionally,
the Company is the guarantor to the German Football League for Sky
Deutschland's Bundesliga broadcasting license for the 2013/14 to
2016/17 seasons in an amount up to 50% of the license fee per
season and the Company has also agreed to extend the maturity of
existing shareholder loans that were issued before it became a
consolidated subsidiary.
In January 2011, the Company purchased a convertible bond from
Sky Deutschland for approximately $225 million. The Company
currently has the right to convert the bonds into 53.9 million
underlying Sky Deutschland shares, subject to certain black-out
periods. If not converted, the Company will have the option to
redeem the bonds for cash upon their maturity in January 2015. The
convertible bonds were separated into their host and derivative
financial instrument components. Prior to Sky Deutschland becoming
a consolidated subsidiary, both the host and derivative financial
instrument components were recorded at their estimated fair value
in Investments in the consolidated balance sheets. The change in
estimated fair value of the derivative instrument resulted in a
gain of approximately $58 million and a loss of approximately $82
million and were recorded in Other, net in the Company's unaudited
consolidated statements of operations for the nine months ended
March 31, 2013 and 2012, respectively. The change in estimated fair
value of the host was not material for the nine months ended March
31, 2013 and 2012. Subsequent to becoming a consolidated
subsidiary, the convertible loan was effectively settled as a
pre-existing relationship under the provisions of ASC 805-10-25-21
with
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
the carrying amount of the asset for the derivative component
written off as a settlement loss which was included in Other, net
in the unaudited consolidated statements of operations for the
three and nine months ended March 31, 2013.
NDS
In July 2012, the Company sold its 49% investment in NDS to
Cisco Systems Inc. for approximately $1.9 billion, of which
approximately $60 million has been set aside in escrow to satisfy
any indemnification obligations. The Company recorded a gain of
approximately $1.4 billion on this transaction which was included
in Other, net in the unaudited consolidated statements of
operations for the nine months ended March 31, 2013.
Other
In March 2012, the Company sold its 17% interest in Hathway
Cable and Datacom Limited for approximately $71 million. The
Company recorded a gain of approximately $23 million on this
transaction which was included in Other, net in the consolidated
statements of operations for the nine months ended March 31,
2012.
In May 2012, the Company acquired a 17% interest in Bona Film
Group ("Bona"), a film distributor in China, for approximately $70
million in cash. As a result of this transaction, the Company has
significant influence and therefore, accounts for its investment in
Bona under the equity method of accounting.
In March 2013, the Company sold a portion of its interest in
Phoenix Satellite Television ("Phoenix"), for approximately $90
million in cash. The Company decreased its interest in Phoenix to
approximately 12% from the 18% it owned at June 30, 2012. The
Company recorded a gain of approximately $81 million on this
transaction which was included in Other, net in the unaudited
consolidated statements of operations for the three and nine months
ended March 31, 2013.
Fair value of available-for-sale investments
The cost basis, unrealized gains, unrealized losses and fair
market value of available-for-sale investments are set forth
below:
As of As of
March June
31, 30,
2013 2012
--------- --------
(in millions)
Cost basis of available-for-sale investments $ 37 $ 278
Accumulated gross unrealized gain 268 305
Accumulated gross unrealized loss - (22)
Fair value of available-for-sale investments (a) $ 305 $ 561
Net deferred tax liability (b) $ 94 $ 108
(a) Includes investments in publicly traded common stock, which were valued using
quoted market prices, and as of June 30, 2012 the convertible bond issued
by Sky Deutschland, which consisted of the host and derivative financial
instrument components. Prior to the consolidation of Sky Deutschland, the
convertible bond components were measured using the discounted cash flows
and Black-Scholes valuation methods. Inputs to these valuation measures included
observable market data such as stock prices and interest rates.
(b) The net deferred tax liability includes $94 million and $107 million related
to unrealized gains recorded in comprehensive income as of March 31, 2013
and June 30, 2012, respectively.
NOTE 7. FAIR VALUE
In accordance with ASC 820, "Fair Value Measurement," 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 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," the Company has
included additional disclosures about the Company's derivatives and
hedging activities (Level 2).
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The tables below present information about financial assets and
liabilities carried at fair value on a recurring basis:
Fair Value Measurements
--------------------------------------------------------------
As of March 31, 2013
--------------------------------------------------------------
Quoted
Prices
in Active
Markets Significant
for Other Significant
Identical Observable Unobservable
Instruments Inputs Inputs
(Level (Level (Level
Description Total 1) 2) 3)
----------------------------------------- --------- -------------- ------------- ---------------
(in millions)
Assets
Available-for-sale securities (a) $ 305 $ 305 $ - $ -
Derivatives (b) 4 - 4 -
Liabilities
Derivatives (b) (13) - (13) -
Redeemable noncontrolling interests
(c) (645) - - (645)
Total $ (349) $ 305 $ (9) $ (645)
As of June 30, 2012
--------------------------------------------------------------
Quoted
Prices
in Active
Markets Significant
for Other Significant
Identical Observable Unobservable
Instruments Inputs Inputs
(Level (Level (Level
Description Total 1) 2) 3)
----------------------------------------- --------- -------------- ------------- ---------------
(in millions)
Assets
Available-for-sale securities (a) $ 561 $ 351 $ 210 $ -
Derivatives (b) 17 - 17 -
Redeemable noncontrolling interests
(c) (641) - - (641)
Total $ (63) $ 351 $ 227 $ (641)
(a) See Note 6-Investments.
(b) Represents derivatives associated with the Company's foreign exchange forward
contracts.
(c) The Company accounts for the redeemable noncontrolling interests in accordance
with ASC 480-10-S99-3A because their exercise is outside the control of the
Company and, accordingly, as of March 31, 2013 and June 30, 2012, has included
the fair value of the redeemable noncontrolling interests in the consolidated
balance sheets. The majority of redeemable noncontrolling interests recorded
at fair value are put arrangements held by the noncontrolling interests in
two of the Company's majority-owned RSNs and in one of the Company's Asian
general entertainment television joint ventures.
The Company utilizes the market, income or cost approaches or a
combination of these valuation techniques for its Level 3 fair
value measures. Inputs to such measures could include observable
market data obtained from independent sources such as broker quotes
and recent market transactions for similar assets. It is the
Company's policy to maximize the use of observable inputs in the
measurement of its Level 3 fair value measurements. To the extent
observable inputs are not available, the Company utilizes
unobservable inputs based upon the assumptions market participants
would use in valuing the asset. Examples of utilized unobservable
inputs are future cash flows, long term growth rates and applicable
discount rates.
Significant unobservable inputs used in the fair value
measurement of the Company's redeemable noncontrolling interests
are earnings before interest, taxes, depreciation and amortization
("EBITDA") growth rates (3%-4% range) and discount rates (8%-9%
range). Significant increases (decreases) in growth rates and
multiples, assuming no change in discount rates, would result in a
significantly higher (lower) fair value measurement. Significant
decreases (increases) in discount rates, assuming no changes in
growth rates and multiples, would result in a significantly higher
(lower) fair value measurement.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the redeemable noncontrolling interests in the
RSNs were primarily determined by (i) applying a multiples-based
formula that is intended to approximate fair value for one of the
RSNs and (ii) using a discounted EBITDA valuation model, assuming a
9% discount rate for the other RSN. As of March 31, 2013, the
minority shareholder's put right in one of the RSNs is currently
exercisable.
The fair value of the redeemable noncontrolling interest in the
Asian general entertainment television joint venture was determined
using a market approach. As of March 31, 2013, the minority
shareholder's put right is exercisable.
The remaining redeemable noncontrolling interest is currently
not exercisable and is not material.
The changes in redeemable noncontrolling interests classified as
Level 3 measurements were as follows:
For the nine months
ended
March 31,
---------------------------
2013 2012
----------- ----------
(in millions)
Beginning of period $ (641) $ (242)
Total gains (losses) included in net
income (74) (55)
Total gains (losses) included in other
comprehensive income - -
Issuance of redeemable noncontrolling
interest - (273)
Other 70 (32)
End of period $ (645) $ (602)
Financial Instruments
The carrying value of the Company's financial instruments,
including cash and cash equivalents, receivables, payables and cost
investments, approximates fair value.
The aggregate fair value of the Company's borrowings at March
31, 2013 was approximately $19,939 million compared with a carrying
value of $16,474 million and, at June 30, 2012, was approximately
$18,300 million compared with a carrying value of $15,455 million.
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.
Foreign Currency Forward Contracts
The Company uses financial instruments designated as cash flow
hedges primarily to hedge certain exposures to foreign currency
exchange risks associated with the cost for producing or acquiring
films and television programming abroad. The notional amount of
foreign exchange forward contracts designated as cash flow hedges
with foreign currency risk outstanding at March 31, 2013 and June
30, 2012 was $318 million and $294 million, respectively. As of
March 31, 2013 and June 30, 2012, the fair values of the foreign
exchange forward contracts of approximately $4 million and $17
million, respectively, were recorded in the underlying hedged
balances. The Company's foreign currency forward contracts are
valued using an income approach based on the present value of the
forward rate less the contract rate multiplied by the notional
amount.
The effective changes in fair value of derivatives designated as
cash flow hedges for the three months ended March 31, 2013 and 2012
of $5 million and $(8) million, respectively, were recorded in
accumulated other comprehensive income with foreign currency
translation adjustments. The effective changes in fair value of
derivatives designated as cash flow hedges for the nine months
ended March 31, 2013 and 2012 of nil and $47 million, respectively,
were recorded in accumulated other comprehensive income with
foreign currency translation adjustments. The ineffective changes
in fair value of derivatives designated as cash flow hedges were
immaterial. Amounts are reclassified from accumulated other
comprehensive income when the underlying hedged item is recognized
in earnings. During the three months ended March 31, 2013 and 2012,
the Company reclassified (losses) gains of approximately $(2)
million and $11 million, respectively, from other comprehensive
income to net income. During the nine months ended March 31, 2013
and 2012, the Company reclassified gains of approximately $13
million and $12 million, respectively, from other comprehensive
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
income to net income. The Company expects to reclassify the
cumulative change in fair value included in other comprehensive
income within the next 24 months. Cash flows from the settlement of
foreign exchange forward contracts offset cash flows from the
underlying hedged item and are included in operating activities in
the consolidated statements of cash flows.
Changes in the fair value of derivatives that are not designated
as hedges are recorded in earnings each period. The Company uses
these financial instruments as economic hedges for certain
exposures to foreign currency exchange risks. The notional amount
of foreign exchange forward contracts used as economic hedges with
foreign currency risk outstanding at March 31, 2013 was $726
million. As of March 31, 2013, the fair values of the foreign
exchange forward contracts of approximately $(13) million were
recorded in other current liabilities. The Company expects the
economic hedges utilized against the majority of this exposure to
be settled in the fourth quarter of fiscal 2013. The effective
changes in fair value of derivatives designated as economic hedges
for the three and nine months ended March 31, 2013 of $(13) million
were recorded in net income. Derivatives designated as economic
hedges in the corresponding prior year periods were immaterial.
Concentrations of Credit Risk
Cash and cash equivalents are maintained with several financial
institutions. The Company has deposits held with banks that 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 Company's receivables did not represent significant
concentrations of credit risk as of March 31, 2013 or June 30, 2012
due to the wide variety of customers, markets and geographic areas
to which the Company's 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
March 31, 2013, the Company did not anticipate nonperformance by
any of the counterparties.
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying value of goodwill, by segment, are
as follows:.
Direct
Cable Broadcast
Network Filmed Satellite Total
Programming Entertainment Television Television Publishing Other Goodwill
----------- --------------- ------------ ---------- ------------ ------- --------
(in millions)
Balance, June
30,
2012 $ 6,494 $ 1,557 $ 1,909 $ 554 $ 2,152 $ 508 $ 13,174
Acquisitions 955 - - 5,429 96 518 6,998
Dispositions - (5) (27) - - (31) (63)
Foreign
exchange
movements - (15) - (21) 7 4 (25)
Impairments - - - - - (35) (35)
Adjustments 90 - - - - - 90
Balance,
March 31,
2013 $ 7,539 $ 1,537 $ 1,882 $ 5,962 $ 2,255 $ 964 $ 20,139
The increase in the carrying value of Goodwill during the nine
months ended March 31, 2013 was primarily due to the consolidation
of Sky Deutschland at the Direct Broadcast Satellite Television
segment, the consolidation of Fox Sports Asia and the acquisitions
of EMM and SportsTime Ohio at the Cable Network Programming segment
and the consolidation of FOX SPORTS Australia at the Other segment.
The increase at the Publishing segment was primarily due to the
acquisition of Thomas Nelson.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. BORROWINGS
Notes Due 2022
In September 2012, News America Incorporated ("NAI"), a
wholly-owned subsidiary of the Company, issued $1.0 billion of
3.00% Senior Notes due 2022. The net proceeds of approximately $987
million will be used for general corporate purposes.
Notes Due 2013
In February 2013, the Company retired the remaining $273 million
of its 9.25% Senior Debentures.
Other
In August 2006, the Company entered into a loan agreement with
Raiffeisen Zentralbank Österreich AG ("RZB"), which was
subsequently amended in September 2009. The Company repaid the
outstanding balance of $32 million in July 2011 in connection with
the disposal of News Outdoor Russia.
In January 2013, Sky Deutschland, a majority owned subsidiary of
the Company, entered into a credit agreement, with major financial
institutions, that NAI and the Company have both guaranteed. The
credit agreement provides a EUR300 million unsecured credit
facility with a sub-limit of EUR75 million revolving credit
facility available for cash drawdowns or the issuance of letters of
credit and a maturity date of January 2018. Sky Deutschland may
request that the maturity date be extended for one year. The
significant terms of the agreement include limitations on liens and
indebtedness. Fees under the credit agreement are based on the
Company's long-term senior unsecured non-credit enhanced debt
ratings. Given the current debt ratings of the Company, Sky
Deutschland pays a facility fee of 0.125% and interest of
Eurocurrency Rate plus 1.125%. As of March 31, 2013, EUR225 million
(approximately $290 million) was outstanding under this credit
agreement and EUR75 million available for either additional
financing or letters of credit. The proceeds were used to pay off
existing Sky Deutschland debt.
Included in Borrowings within current liabilities as of March
31, 2013, was 8.625% Senior Notes of A$150 million ($157 million)
that is due in the next 12 months.
NOTE 10. FILM PRODUCTION FINANCING
The Company enters into arrangements with third parties to
co-produce certain 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 international. 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 third-party investor's
contractual interest in the profits or losses incurred on the film.
Consistent with the requirements of ASC 926, "Entertainment-Films,"
the estimate of the third-party investor's interest in profits or
losses incurred on the film is determined by reference to the ratio
of actual revenue earned to date in relation to total estimated
ultimate revenues. During fiscal 2013, the Company entered into a
new co-financing arrangement with a new investor group for a five
year term for production through December 31, 2017, with the option
to extend.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCKHOLDERS' EQUITY
The following table summarizes changes in equity:
For the three months ended March 31,
---------------------------------------------------------------------------------------------
2013 2012
--------------------------------------------- ---------------------------------------------
News News
Corporation Noncontrolling Total Corporation Noncontrolling Total
Stockholders Interests Equity Stockholders Interests Equity
------------ ---------------- ------- ------------ ---------------- -------
(in millions)
Balance,
beginning
of period $ 28,152 $ 853 $29,005 $ 28,017 $ 495 $28,512
Net income 2,854 29 (a) 2,883 937 45 (a) 982
Other
comprehensive
(loss) income (447) - (447) 414 - 414
Cancellation
of shares,
net (361) - (361) (734) - (734)
Dividends
declared (197) - (197) (209) - (209)
Acquisitions - 2,301 (b) 2,301 - - -
)
Other 63 2 (c) 65 45 (2 (c) 43
Balance, end
of period $ 30,064 $ 3,185 $33,249 $ 28,470 $ 538 $29,008
For the nine months ended March 31,
---------------------------------------------------------------------------------------------
2013 2012
--------------------------------------------- ---------------------------------------------
News News
Corporation Noncontrolling Total Corporation Noncontrolling Total
Stockholders Interests Equity Stockholders Interests Equity
------------ ---------------- ------- ------------ ---------------- -------
(in millions)
Balance,
beginning
of period $ 24,684 $ 501 $25,185 $ 30,069 $ 578 $30,647
Net income 7,468 121 (a) 7,589 2,732 129 (a) 2,861
Other
comprehensive
loss (138) 2 (136) (667) (4) (671)
Cancellation
of shares,
net (1,573) - (1,573) (3,134) - (3,134)
Dividends
declared (398) - (398) (455) - (455)
Acquisitions - 2,619 (b) 2,619 - 3 3
) )
Other 21 (58 (c) (37) (75) (168 (c) (243)
Balance, end
of period $ 30,064 $ 3,185 $33,249 $ 28,470 $ 538 $29,008
(a) Net income attributable to noncontrolling interests excludes $26 million
and $21 million for the three months ended March 31, 2013 and 2012, respectively,
and $74 million and $55 million for the nine months ended March 31, 2013
and 2012, respectively, relating to redeemable noncontrolling interests which
are reflected in temporary equity.
(b) Represents the non-controlling interest in Sky Deutschland and EMM at their
acquisition date fair values. The Company acquired the power to control Sky
Deutschland in January 2013 and in EMM in November 2012.
(c) Other activity attributable to noncontrolling interests excludes $(30) million
and $(6) million for the three months ended March 31, 2013 and 2012, respectively,
and $(70) million and $305 million for the nine months ended March 31, 2013
and 2012, respectively, relating to redeemable noncontrolling interests.
Dividends
The Company declared a dividend of $0.085 per share on both the
Class A common stock, par value $0.01 per share ("Class A Common
Stock") and the Class B common stock, par value $0.01 per share
("Class B Common Stock") in the three months ended March 31, 2013,
which was paid in April 2013 to stockholders of record on March 13,
2013. The related total aggregate dividend paid to stockholders in
April 2013 was approximately $200 million.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company declared a dividend of $0.085 per share on both the
Class A Common Stock and the Class B Common Stock in the three
months ended September 30, 2012, which was paid in October 2012 to
stockholders of record on September 12, 2012. The related total
aggregate dividend paid to stockholders in October 2012 was
approximately $200 million.
The Company declared a dividend of $0.085 per share on both the
Class A Common Stock and the Class B Common Stock in the three
months ended March 31, 2012, which was paid in April 2012 to
stockholders of record on March 14, 2012. The related total
aggregate dividend paid to stockholders in April 2012 was
approximately $209 million.
The Company declared a dividend of $0.095 per share on both the
Class A Common Stock and the Class B Common Stock in the three
months ended September 30, 2011, which was paid in October 2011 to
stockholders of record on September 14, 2011. The related total
aggregate dividend paid to stockholders in October 2011 was
approximately $246 million.
Stock Repurchase Program
The Board had previously authorized a total stock repurchase
program of $6 billion with a remaining authorized amount under the
program of approximately $1.8 billion, excluding commissions as of
June 30, 2011. In July 2011, the Company announced that the Board
had authorized increasing the total amount of the stock repurchase
program remaining by approximately $3.2 billion to $5 billion.
In May 2012, the Company announced that the Board approved a $5
billion increase to the Company's stock repurchase program for the
repurchase of Class A Common Stock.
The remaining authorized amount under the Company's stock
repurchase program as of March 31, 2013, excluding commissions, was
approximately $3.6 billion.
The program may be modified, extended, suspended or discontinued
at any time.
Temporary Suspension of Voting Rights Affecting Non-U.S.
Stockholders
On April 18, 2012, the Company announced that it suspended 50%
of the voting rights of the Class B Common Stock held by
stockholders who are not U.S. citizens ("Non-U.S. Stockholders") in
order to maintain compliance with U.S. law which states that no
broadcast station licensee may be owned by a corporation if more
than 25% of that corporation's stock was owned or voted by Non-U.S.
Stockholders. The Company owns broadcast station licensees in
connection with its ownership and operation of U.S. television
stations. As of April 2013, the suspension of voting rights of
shares of Class B Common Stock held by Non-U.S. Stockholders was
40%. This suspension of voting rights will remain in place for as
long as the Company deems it necessary to maintain compliance with
applicable U.S. law, and may be adjusted by the Audit Committee as
it deems appropriate. However, the suspension will not apply in
connection with any vote on any matter on which holders of Class A
Common Stock shall be entitled to vote together with holders of
Class B Common Stock as described in the Company's Restated
Certificate of Incorporation. The suspension will not impact the
rights of Non-U.S. Stockholders of Class B Common Stock to receive
dividends and distributions. The suspension was the subject of
litigation as to which the court has approved the settlement and
dismissed the action with prejudice. (See Note 13-Commitments and
Contingencies for a summary of the litigation and settlement)
Voting Agreement with the Murdoch Family Interests
On April 18, 2012, the Murdoch Family Trust and K. Rupert
Murdoch (together the "Murdoch Family Interests") entered into an
agreement with the Company, whereby the Murdoch Family Interests
agreed to limit their voting rights during the voting rights
suspension period. Under this agreement, the Murdoch Family
Interests will not vote or provide voting instructions with respect
to a portion of their shares of Class B Common Stock to the extent
that doing so would increase their percentage of voting power from
what it was prior to the suspension of voting rights. Currently, as
a result of the suspension of voting rights, the aggregate
percentage vote of the Murdoch Family Interests is at 39.4% of the
outstanding shares of Class B Common Stock not subject to the
suspension of voting rights, and the percentage vote may be
adjusted as provided in the agreement with the Company.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. EQUITY BASED COMPENSATION
The following table summarizes the Company's equity-based
compensation transactions:
For the three For the nine
months months
ended March ended March
31, 31,
------------------- ----------------
2013 2012 2013 2012
---------- ------- --------- -----
(in millions)
Equity-based compensation $ 75 $ 58 $ 233 $ 165
Cash received from exercise of equity-based
compensation $ 29 $ 72 $ 148 $ 80
As of March 31, 2013, the Company's total compensation cost
related to restricted stock units ("RSUs") and performance stock
units ("PSUs") not yet recognized for all equity-based compensation
plans was approximately $236 million, and is expected to be
recognized over a weighted average period between one and two
years. Compensation expense on all equity-based awards is generally
recognized on a straight-line basis over the vesting period of the
entire award. However, certain performance based awards are
recognized on an accelerated basis.
The intrinsic value of stock options exercised during the nine
months ended March 31, 2013 and 2012 was $51 million and $18
million, respectively. The intrinsic value of the stock options
outstanding as of March 31, 2013 and June 30, 2012 was $47 million
and $39 million, respectively.
As of March 31, 2013 and June 30, 2012, the liability for
cash-settled awards was approximately $176 million and $119
million, respectively. Cash settled awards are marked-to-market at
each reporting period.
The Company recognized a tax benefit on vested RSUs and stock
options exercised of approximately $34 million and $13 million for
the nine months ended March 31, 2013 and 2012, respectively.
Performance Stock Units
During the nine months ended March 31, 2013 and 2012,
approximately 7.9 million and 9.1 million target PSUs were granted,
respectively, of which 6.1 million and 6.8 million, respectively,
will be settled in shares of Class A Common Stock. PSUs granted to
executive directors and certain awards granted to employees in
certain foreign locations are settled in cash.
Restricted Stock Units
During the nine months ended March 31, 2013 and 2012,
approximately 1.4 million and 6.7 million RSUs were granted,
respectively, of which 1.3 million and 6.5 million, respectively,
will be settled in shares of Class A Common Stock. RSUs granted to
executive directors and certain awards granted to employees in
certain foreign locations are settled in cash.
During the nine months ended March 31, 2013 and 2012,
approximately 7.1 million and 8.4 million RSUs vested,
respectively, of which approximately 6.2 million and 7.2 million,
respectively, were settled in shares of Class A Common Stock,
before statutory tax withholdings. The fair value of RSUs settled
in shares of Class A Common Stock was approximately $147 million
and $119 million for the nine months ended March 31, 2013 and 2012,
respectively. The remaining 0.9 million and 1.2 million RSUs
settled during the nine months ended March 31, 2013 and 2012,
respectively, were settled in cash of approximately $22 million and
$19 million, respectively, before statutory tax withholdings.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has commitments under certain firm contractual
arrangements ("firm commitments") to make future payments. These
firm commitments secure the future rights to various assets and
services to be used in the normal course of operations. The total
firm commitments and future debt payments as of March 31, 2013 and
June 30, 2012 were $82,946 million and $63,644 million,
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
respectively. The increase from June 30, 2012 was primarily due
to the businesses acquired or consolidated during the nine months
ended March 31, 2013, the renewal of rights for MLB and NASCAR and
the issuance of 3.00% Senior Notes due 2022.
Guarantees
The Company also has certain contractual arrangements in
relation to certain investees that would require the Company to
make payments or provide funding if certain circumstances occur
("contingent guarantees"). The Company does not expect that these
contingent guarantees will result in any material amounts being
paid by the Company in the foreseeable future. The total contingent
guarantees decreased 6% as of March 31, 2013 as compared to June
30, 2012 due to the acquisition of 50% of Fox Sports Asia that the
Company did not own, partially offset by an additional guarantee
issued to Hulu as noted below.
In October 2012, Hulu redeemed Providence Equity Partners'
equity interest for $200 million. In connection with the
transaction, Hulu incurred a charge primarily related to employee
equity-based compensation. Accordingly, the Company recorded
approximately $60 million to reflect its share of the charge in the
second quarter of fiscal 2013. The Company has guaranteed $115
million of Hulu's $338 million five-year term loan which was used
by Hulu, in part, to finance the transaction. The fair value of
this guarantee was calculated using level 3 inputs and was included
in the consolidated balance sheet in other liabilities. As of March
31, 2013 the Company owns 34% of Hulu and continues to account for
its interest in Hulu as an equity method investment.
In April 2013, the Company sold its 10% investment in its joint
venture formed with CME Group Inc. ("CME"). As a result of the
transaction, the Company was released from its agreement to
indemnify CME with respect to any payment of principal, premium and
interest CME makes under its guarantee of the third-party debt
issued by the joint venture.
Contingencies
Shareholder Litigation
Delaware
On March 16, 2011, a complaint seeking to compel the inspection
of the Company's books and records pursuant to 8 Del. C. -- 220,
captioned Central Laborers Pension Fund v. News Corporation, was
filed in the Delaware Court of Chancery. The plaintiff requested
the Company's books and records to investigate alleged possible
breaches of fiduciary duty by the directors of the Company in
connection with the Company's purchase of Shine (the "Shine
Transaction"). The Company moved to dismiss the action. On November
30, 2011, the court issued an order granting the Company's motion
and dismissing the complaint. The plaintiff filed a notice of
appeal on December 13, 2011. The Delaware Supreme Court heard
argument on the fully-briefed appeal on April 18, 2012 and issued a
decision on May 29, 2012 in which it affirmed the Court of
Chancery's dismissal of the complaint.
Also on March 16, 2011, two purported shareholders of the
Company, one of which was Central Laborers Pension Fund, filed a
derivative action in the Delaware Court of Chancery, captioned The
Amalgamated Bank v. Murdoch, et al. (the "Amalgamated Bank
Litigation"). The plaintiffs alleged that both the directors of the
Company and Rupert Murdoch as a "controlling shareholder" breached
their fiduciary duties in connection with the Shine Transaction.
The suit named as defendants all directors of the Company, and
named the Company as a nominal defendant. Similar claims against
the same group of defendants were filed in the Delaware Court of
Chancery by a purported shareholder of the Company, New Orleans
Employees' Retirement System, on March 25, 2011 (the "New Orleans
Employees' Retirement Litigation"). Both the Amalgamated Bank
Litigation and the New Orleans Employees' Retirement Litigation
were consolidated on April 6, 2011 (the "Consolidated Action"),
with The Amalgamated Bank's complaint serving as the operative
complaint. The Consolidated Action was captioned In re News Corp.
Shareholder Derivative Litigation. On April 9, 2011, the court
entered a scheduling order governing the filing of an amended
complaint and briefing on potential motions to dismiss.
Thereafter, the plaintiffs in the Consolidated Action filed a
Verified Consolidated Shareholder Derivative and Class Action
Complaint (the "Consolidated Complaint") on May 13, 2011, seeking
declaratory relief and damages. The Consolidated Complaint largely
restated the claims in The Amalgamated Bank's initial complaint and
also raised a direct claim on behalf of a purported class of
Company shareholders relating to the possible addition of Elisabeth
Murdoch to the Company's Board. The defendants filed opening briefs
in support of motions to dismiss the Consolidated Complaint on June
10, 2011, as contemplated by the court's scheduling order. On July
8, 2011, the plaintiffs filed a Verified Amended Consolidated
Shareholder Derivative and Class Action Complaint (the "Amended
Complaint"). In addition to the claims that were previously raised
in the Consolidated Complaint, the Amended Complaint brought claims
relating to the alleged acts of voicemail interception at The News
of the World (the "NoW Matter"). Specifically, the plaintiffs
claimed in the Amended Complaint that the directors of the Company
failed in their duty of oversight regarding the NoW Matter.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On July 15, 2011, another purported stockholder of the Company
filed a derivative action captioned Massachusetts Laborers' Pension
& Annuity Funds v. Murdoch, et al., in the Delaware Court of
Chancery (the "Mass. Laborers Litigation"). The complaint names as
defendants the directors of the Company and the Company as a
nominal defendant. The plaintiffs' claims are substantially similar
to those raised by the Amended Complaint in the Consolidated
Action. Specifically, the plaintiff alleged that the directors of
the Company have breached their fiduciary duties by, among other
things, approving the Shine Transaction and for failing to exercise
proper oversight in connection with the NoW Matter. The plaintiff
also brought a breach of fiduciary duty claim against Rupert
Murdoch as "controlling shareholder," and a waste claim against the
directors of the Company. The action seeks as relief damages,
injunctive relief, fees and costs. On July 25, 2011, the plaintiffs
in the Consolidated Action requested that the court consolidate the
Mass. Laborers Litigation into the Consolidated Action. On August
24, 2011, the Mass. Laborers Litigation was consolidated with the
Consolidated Action.
On September 29, 2011, the plaintiffs filed a Verified Second
Amended Consolidated Shareholder Derivative and Class Action
Complaint ("Second Amended Complaint"). In the Second Amended
Complaint, the plaintiffs removed their claims involving the
possible addition of Elisabeth Murdoch to the Company's Board,
added some factual allegations to support their remaining claims
and added a claim seeking to enjoin a buyback of Common B shares to
the extent it would result in a change of control. The Second
Amended Complaint seeks declaratory relief, an injunction
preventing the buyback of Class B shares, damages, pre- and
post-judgment interest, fees and costs.
The defendants filed a motion to dismiss the Second Amended
Complaint. The hearing on the defendants' fully-briefed motion to
dismiss was postponed to allow further briefing by plaintiffs after
the Cohen Litigation, which is defined and described below, was
consolidated with the Consolidated Action.
On March 2, 2012, another purported stockholder of the Company
filed a derivative action captioned Belle M. Cohen v. Murdoch, et
al., in the Delaware Court of Chancery (the "Cohen Litigation").
The complaint names as defendants the directors of the Company and
the Company as a nominal defendant. The complaint's claims and
allegations pertain to the NoW Matter and are substantially similar
to the NoW Matter allegations raised in the Second Amended
Complaint in the Consolidated Action. The complaint asserts causes
of action against the defendants for alleged breach of fiduciary
duty, gross mismanagement, contribution and indemnification, abuse
of control, and waste of corporate assets. The action seeks as
relief damages, fees and costs. On March 20, 2012, the Cohen
Litigation was consolidated with the Consolidated Action.
On June 18, 2012, the plaintiffs in the Consolidated Action
filed a Verified Third Amended Consolidated Shareholder Derivative
Complaint (the "Third Amended Complaint"). The Third Amended
Complaint alleges claims against director defendants for breach of
fiduciary duty arising from the Shine Transaction; against Rupert
Murdoch for breach of fiduciary duty as the purported controlling
shareholder of the Company in connection with the Shine
Transaction; against director defendants for breach of fiduciary
duty arising from their purported failure to investigate illegal
conduct in the NoW Matter and allegedly permitting the Company to
engage in a cover up; against certain defendants for breach of
fiduciary duty in their capacity as officers arising from a
purported failure to investigate illegal conduct in the NoW Matter
and allegedly permitting the Company to engage in a cover up; and
against James Murdoch for breach of fiduciary duty for allegedly
engaging in a cover up related to the NoW Matter. The class action
claim asserted in the Second Amended Complaint pertaining to the
buyback of Common B shares and the relief related to that claim
were removed. The Third Amended Complaint seeks a declaration that
the defendants violated their fiduciary duties, damages, pre- and
post-judgment interest, fees and costs.
On July 18, 2012, the defendants renewed their postponed motion
to dismiss in the Consolidated Action, and in support thereof, they
filed supplemental briefing directed towards the allegations of the
Third Amended Complaint. Plaintiffs' response was filed on August
8, 2012. A hearing on the fully briefed motion was held in Chancery
Court on September 19, 2012. The Court reserved decision.
On April 17, 2013, the parties reached an agreement in principle
to settle the Consolidated Action. Pursuant to the terms of that
settlement, which is subject to the approval of the Delaware Court
of Chancery after notice to the stockholders and a hearing, the
parties agreed that the director defendants in the Consolidated
Action would cause to be paid on their behalf the amount of $139
million to the Company, minus any attorneys' fees and expenses
awarded by the Court to the plaintiffs' counsel. Such amount is to
be paid from an escrow account created for the benefit of the
director defendants pursuant to an agreement reached between the
defendants and their directors' and officers' liability insurers
for the payment of insurance proceeds, subject to a claims release.
In addition to the payment to the Company, the settlement
contemplates that the Company will build on corporate governance
and
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
compliance enhancements which the Company has implemented in the
past year. These shall remain in effect at least through December
31, 2016, and would be applicable to both 21st Century Fox and New
News Corporation. The Memorandum of Understanding related to the
settlement has been filed with the Court. On May 3, 2013, the
Stipulation of Settlement was filed with the Court. On May 6, 2013,
the Court entered a Scheduling Order, which, among other things,
set the settlement hearing for June 26, 2013, and approved the form
of Notice of Pendency of Derivative Action, Proposed Settlement of
Derivative Action, Settlement Hearing, and Right to Appear, which
is being distributed to holders of the Company's common stock in
accordance with the Scheduling Order. In addition to requiring the
approval of the Delaware Court of Chancery, the settlement will not
become effective unless the Shields Litigation, the Iron Workers
Litigation and the Stricklin Litigation (each as described below
under the heading "Shareholder Litigation-Southern District of New
York") are also dismissed.
On May 30, 2012, a purported stockholder of the Company filed a
class action lawsuit in the Delaware Court of Chancery on behalf of
all non-U.S. stockholders of the Company's Class B shares,
captioned Första Ap-Fonden v. News Corporation, et al. The
plaintiff alleges that, by temporarily suspending 50% of the voting
rights of the Class B shares held by non-U.S. stockholders to
remain in compliance with U.S. governing broadcast licenses (the
"Suspension"), the Company and the Board violated the Company's
charter and the General Corporation Law of the State of Delaware
("DGCL") and the directors breached their fiduciary duties, both in
approving the Suspension and in failing to monitor the Company's
ownership by non-U.S. stockholders. The complaint named as
defendants the Company and all directors of the Company at the time
of the Suspension. The complaint sought a declaration that the
defendants violated the Company's charter and the DGCL, a
declaration that the directors breached their fiduciary duties, a
declaration that the Suspension is invalid and unenforceable, an
injunction of the Suspension, damages, fees, and costs. On June 11,
2012, the defendants filed an opening brief in support of a motion
to dismiss the complaint in its entirety. On August 2, 2012, the
plaintiff filed a Verified Amended and Supplemented Class Action
Complaint (the "Amended and Supplemented Complaint"). The Amended
and Supplemented Complaint seeks a declaration that the defendants
violated the Company's charter and the DGCL, a declaration that the
directors breached their fiduciary duties, a declaration that the
Suspension is invalid and unenforceable, an injunction of the
Suspension, a declaration that non-U.S. stockholders of the
Company's Class B shares are entitled to vote all of their shares
on the Proposed Separation Transaction, damages, fees, and costs.
On August 28, 2012, the parties entered into a Memorandum of
Understanding providing for an agreement in principle to settle the
lawsuit. The Memorandum of Understanding, which was filed with the
Court on September 5, 2012, provides in pertinent part: (i) within
5 business days after receiving Court approval, the Company will
file a petition with the FCC requesting permission to comply with
law governing broadcast licenses for any meeting of stockholders by
(a) determining the number of shares held by foreign stockholders
that are present at the meeting and that would be entitled to vote
but for the Suspension, and (b) counting as votes cast all voted
shares held by foreign stockholders, up to a total of 25% of the
shares voted; (ii) the Company's Audit Committee will determine on
at least an annual basis the total number of voting shares held by
non-U.S. citizens and will have the power to modify or eliminate
any then-existing suspension; the Company will disclose this
information in its annual proxy materials and (iii) the Company
will not consent to amend, modify or terminate the Murdoch Family
Interests agreement without prior approval of the Audit Committee,
which in the case of any vote related to the Proposed Separation
Transaction, must be unanimous. The settlement is subject to Court
approval after notice to the stockholders and a hearing. The
Stipulation of Settlement was filed with the Court on November 30,
2012. On December 10, 2012, the Court entered a Scheduling Order,
which, among other things, set the settlement hearing for April 26,
2013, and approved the form of Notice of Pendency of Class Action,
Proposed Settlement of Class Action, Settlement Hearing, and Right
to Appear, which has been distributed to holders of the Company's
Class B Common Stock in accordance with the Scheduling Order. At a
hearing held on April 26, 2013, the Court approved the settlement
and dismissed the action with prejudice.
Southern District of New York
On July 18, 2011, a purported shareholder of the Company filed a
derivative action captioned Shields v. Murdoch, et al. ("Shields
Litigation"), in the United States District Court for the Southern
District of New York. The plaintiff alleged violations of Section
14(a) of the Securities Exchange Act, as well as state law claims
for breach of fiduciary duty, gross mismanagement, waste, abuse of
control and contribution/indemnification arising from, and in
connection with, the NoW Matter. The complaint names the directors
of the Company as defendants and names the Company as a nominal
defendant, and seeks damages and costs. On August 4, 2011, the
plaintiff filed an amended complaint. The plaintiff seeks
compensatory damages, an order declaring the October 15, 2010
shareholder vote on the election of the Company's directors void;
an order setting an emergency shareholder vote date for election of
new directors; an order requiring the Company to take certain
specified corporate governance actions; and an order (i) putting
forward a shareholder vote resolution for amendments to the
Company's Article of Incorporation and (ii) taking such other
action as may be necessary to place before shareholders for a vote
on corporate governance policies that: (a) appoint a non-executive
Chair of the Board who is not related to the Murdoch family or
extended family; (b) appoint an independent Chair of the Board's
Audit Committee; (c) appoint at least three independent directors
to the Governance and Nominating Committees; (d) strengthen the
Board's supervision of financial reporting processes and implement
procedures for greater shareholder input into the policies and
guidelines of the Board; and (e) appropriately test and strengthen
the internal and audit control functions.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On July 19, 2011, a purported class action lawsuit captioned
Wilder v. News Corp., et al. ("Wilder Litigation"), was filed on
behalf of all purchasers of the Company's common stock between
March 3, 2011 and July 11, 2011, in the United States District
Court for the Southern District of New York. The plaintiff brought
claims under Section 10(b) and Section 20(a) of the Securities
Exchange Act, alleging that false and misleading statements were
issued regarding the NoW Matter. The suit names as defendants the
Company, Rupert Murdoch, James Murdoch and Rebekah Brooks, and
seeks compensatory damages, rescission for damages sustained, and
costs.
On July 22, 2011, a purported shareholder of the Company filed a
derivative action captioned Stricklin v. Murdoch, et al.
("Stricklin Litigation"), in the United States District Court for
the Southern District of New York. The plaintiff brought claims for
breach of fiduciary duty, gross mismanagement, and waste of
corporate assets in connection with, among other things, (i) the
NoW Matter; (ii) News America's purported payments to settle
allegations of anti-competitive behavior; and (iii) the Shine
Transaction. The action names as defendants the Company, Les
Hinton, Rebekah Brooks, Paul Carlucci and the directors of the
Company. On August 3, 2011, the plaintiff served a motion for
expedited discovery and to appoint a conservator over the Company,
which defendants objected to. The motion has not been formally
calendared and there is no briefing schedule yet. On August 16,
2011, the plaintiffs filed an amended complaint. The plaintiff
seeks various forms of relief including compensatory damages,
injunctive relief, disgorgement, the award of voting rights to
Class A shareholders, the appointment of a conservator over the
Company to oversee the Company's responses to investigations and
litigation related to the NoW Matter, fees and costs.
On August 10, 2011, a purported shareholder of the Company filed
a derivative action captioned Iron Workers Mid-South Pension Fund
v. Murdoch, et al. ("Iron Workers Litigation"), in the United
States District Court for the Southern District of New York. The
plaintiff brought claims for breach of fiduciary duty, waste of
corporate assets, unjust enrichment and alleged violations of
Section 14(a) of the Securities Exchange Act in connection with the
NoW Matter. The action names as defendants the Company, Les Hinton,
Rebekah Brooks and the directors of the Company. The plaintiff
seeks various forms of relief including compensatory damages,
voiding the election of the director defendants, an order requiring
the Company to take certain specified corporate governance actions,
injunctive relief, restitution, fees and costs.
The Wilder Litigation, the Stricklin Litigation and the Iron
Workers Litigation are all now before the judge in the Shields
Litigation. On November 21, 2011, the court issued an order setting
a briefing schedule for the defendants' motion to stay the
Stricklin Litigation, the Iron Workers Litigation and the Shields
Litigation pending the outcome of the consolidated action pending
in the Delaware Court of Chancery. On September 18, 2012, the Court
denied the motion as to two of the cases and dismissed the third
with leave to replead, which plaintiff has done. Specifically, on
October 4, 2012, Stricklin filed a Second Amended Complaint that
added a claim under Section 14(a) of the Securities Exchange Act
challenging the disclosures in the Company's definitive proxy
statements issued during the years of 2005 through 2012. The
plaintiff seeks, among other things, to void the election of the
director defendants at the Company's 2012 annual meeting. The
plaintiffs in Shields, Stricklin and Iron Workers have requested a
pre-motion conference to address the potential consolidation of
these derivative actions and a briefing schedule regarding the
potential leadership structure for the plaintiffs. The pre-motion
conference has not yet been scheduled. In the Wilder Litigation, on
June 5, 2012, the court issued an order appointing the Avon Pension
Fund ("Avon") as lead plaintiff and Robbins Geller Rudman &
Dowd as lead counsel. Thereafter, on July 3, 2012, the court issued
an order providing that an amended consolidated complaint shall be
filed by July 31, 2012. Avon filed an amended consolidated
complaint on July 31, 2012, which among other things, added as
defendants NI Group Limited and Les Hinton, and expanded the class
period to include February 15, 2011 to July 18, 2011. Defendants
filed their motion to dismiss on September 25, 2012, plaintiffs'
opposition was filed November 6, 2012 and defendants' reply was
filed November 30, 2012. The motion is pending.
The Company's management believes these shareholder claims are
entirely without merit, and intends to vigorously defend these
actions. The settlement of the Consolidated Action (described above
under the heading "Shareholder Litigation-Delaware") will not
become effective unless the Shields Litigation, the Iron Workers
Litigation and the Stricklin Litigation are also dismissed.
The News of the World Investigations and Litigation
U.K. and U.S. regulators and governmental authorities continue
to conduct investigations initiated in 2011 with respect to the
U.K. Newspaper Matters. The Company is cooperating with these
investigations.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has admitted liability in many civil cases related
to the phone hacking allegations and has settled many cases. The
Company also announced a private compensation scheme under which
parties could pursue claims against the Company. While additional
civil lawsuits may be filed, no additional civil claims may be
brought under the compensation scheme after April 8, 2013.
The Company is not able to predict the ultimate outcome or cost
of the civil claims or criminal matters. The Company has incurred
legal and professional fees related to the U.K. Newspaper Matters
and costs for civil settlements totaling approximately $42 million
and $63 million during the three months ended March 31, 2013 and
2012, respectively, and $165 million and $167 million during the
nine months ended March 31, 2013 and 2012, respectively. These
costs are included in Selling, general and administrative expenses
in the Company's unaudited consolidated statements of operations.
As of March 31, 2013, the Company has provided for its best
estimate of the liability for the claims that have been filed and
costs incurred and has accrued approximately $60 million. It is not
possible to estimate the liability for any additional claims that
may be filed given the information that is currently available to
the Company. If more claims are filed and additional information
becomes available, the Company will update the liability provision
for such matters.
In connection with the proposed separation, the Company and New
News Corporation will agree in a separation and distribution
agreement that the Company will indemnify New News Corporation for
payments made after the distribution date arising out of civil
claims and investigations relating to the U.K. Newspaper Matters as
well as legal and professional fees and expenses paid in connection
with the criminal matters, other than fees, expenses and costs
relating to employees who are not (i) directors, officers or
certain designated employees or (ii) with respect to civil matters,
co-defendants with New News Corporation. In addition, violations of
law may result in criminal fines or penalties for which New News
Corporation will not be indemnified by the Company. It is possible
that these proceedings and any adverse resolution thereof,
including any fines or other penalties associated with any plea,
judgment or similar result could damage the Company's reputation,
impair its ability to conduct its business and adversely affect its
results of operations and financial condition.
HarperCollins
Commencing on August 9, 2011, twenty-nine purported consumer
class actions have been filed in the U.S. District Courts for the
Southern District of New York and for the Northern District of
California, which relate to the decisions by certain publishers,
including HarperCollins Publishers L.L.C. ("HarperCollins"), to
begin selling their eBooks pursuant to an agency relationship. The
cases all involve allegations that certain named defendants in the
book publishing and distribution industry, including HarperCollins,
violated the antitrust and unfair competition laws by virtue of the
switch to the agency model for eBooks. The actions seek as relief
treble damages, injunctive relief and attorneys' fees. The Judicial
Panel on Multidistrict Litigation has transferred the various class
actions to the Honorable Denise L. Cote in the Southern District of
New York. On January 20, 2012, plaintiffs filed a consolidated
amended complaint, again alleging that certain named defendants,
including HarperCollins, violated the antitrust and unfair
competition laws by virtue of the switch to the agency model for
eBooks. Defendants filed a motion to dismiss on March 2, 2012. On
May 15, 2012, Judge Cote denied defendants' motion to dismiss. On
June 22, 2012, Judge Cote held a status conference to address
discovery and scheduling issues. On June 25, 2012, Judge Cote
issued a scheduling order for the multi-district litigation going
forward. Additional information about In re MDL Electronic Books
Antitrust Litigation, Civil Action No. 11-md-02293 (DLC), can be
found on Public Access to Court Electronic Records (PACER). While
it is not possible to predict with any degree of certainty the
ultimate outcome of these class actions, HarperCollins believes it
was compliant with applicable antitrust and competition laws.
Following an investigation, on April 11, 2012, the Department of
Justice (the "DOJ") filed an action in the U.S. District Court for
the Southern District of New York against certain publishers,
including HarperCollins, and Apple, Inc. The DOJ's complaint
alleges antitrust violations relating to defendants' decisions to
begin selling eBooks pursuant to an agency relationship. This case
was assigned to Judge Cote. Simultaneously, the DOJ announced that
it had reached a proposed settlement with three publishers,
including HarperCollins, and filed a Proposed Final Judgment and
related materials detailing that agreement. Among other things, the
Proposed Final Judgment requires that HarperCollins terminate its
agreements with certain eBook retailers and places certain
restrictions on any agreements subsequently entered into with such
retailers. Pursuant to the Antitrust Procedures and Penalties Act,
the Proposed Final Judgment could not be entered by Judge Cote for
at least sixty days while the DOJ received public comments. The
public comment period ended on June 25, 2012. Pursuant to Judge
Cote's June 25, 2012 scheduling order, the DOJ's motion for entry
of the Proposed Final Judgment was fully briefed by August 22,
2012, and on September 5, 2012, Judge Cote granted the DOJ's motion
and entered
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
the Final Judgment. A third party has filed a motion to
intervene in the case for the purpose of appealing Judge Cote's
decision entering the Final Judgment to the United States Court of
Appeals for the Second Circuit. On March 26, 2013, the United
States Court of Appeals for the Second Circuit dismissed his
appeal. Additional information about the Final Judgment can be
found on the DOJ's website.
Following an investigation, on April 11, 2012, 16 state
Attorneys General led by Texas and Connecticut (the "AGs") filed a
similar action against certain publishers and Apple, Inc. in the
Western District of Texas. On April 26, 2012, the AGs' action was
transferred to Judge Cote. On May 17, 2012, 33 AGs filed a second
amended complaint. As a result of a memorandum of understanding
agreed upon with the AGs for Texas and Connecticut, HarperCollins
was not named as a defendant in this action. Pursuant to the terms
of the memorandum of understanding, HarperCollins entered into a
settlement agreement with the AGs for Texas, Connecticut and Ohio
on June 11, 2012. By August 28, 2012, forty-nine states (all but
Minnesota) and five U.S. territories had signed on to that
settlement agreement. On August 29, 2012, the AGs simultaneously
filed a complaint against HarperCollins and two other publishers, a
motion for preliminary approval of that settlement agreement and a
proposed distribution plan. On September 14, 2012, Judge Cote
granted the AGs' motion for preliminary approval of the settlement
agreement and approved the AGs' proposed distribution plan. Notice
was subsequently sent to potential class members, and a fairness
hearing was
held on February 8, 2013, where Judge Cote granted final
approval of the settlement. The settlement now is effective and the
final judgment will bar consumers from states and territories
covered by the settlement from participating in the class
action.
On October 12, 2012, HarperCollins received a Civil
Investigative Demand from the Attorney General from the State of
Minnesota. HarperCollins complied with the Demand on November 16,
2012 and is cooperating with that investigation. While it is not
possible to predict with any degree of certainty the ultimate
outcome of the inquiry, HarperCollins believes it was compliant
with applicable antitrust laws.
The European Commission conducted an investigation into whether
certain companies in the book publishing and distribution industry,
including HarperCollins, violated the antitrust laws by virtue of
the switch to the agency model for eBooks. Following discussions
with the European Commission, the Office of Fair Trading closed its
investigation in favor of the European Commission's investigation
on December 6, 2011. HarperCollins settled the matter with the
European Commission on terms substantially similar to the
settlement with the DOJ. On December 13, 2012, the European
Commission formally adopted the settlement.
Commencing on February 24, 2012, five purported consumer class
actions were filed in the Canadian provinces of British Columbia,
Quebec and Ontario, which relate to the decisions by certain
publishers, including HarperCollins, to begin selling their eBooks
in Canada pursuant to an agency relationship. The actions seek as
relief special, general and punitive damages, injunctive relief and
the costs of the litigations. While it is not possible to predict
with any degree of certainty the ultimate outcome of these class
actions, especially given their early stages, HarperCollins
believes it was compliant with applicable antitrust and competition
laws and intends to defend itself vigorously.
In July 2012, HarperCollins Canada, a wholly-owned subsidiary of
HarperCollins, learned that the Canadian Competition Bureau ("CCB")
had commenced an inquiry regarding the sale of eBooks in Canada.
HarperCollins currently is cooperating with the CCB with respect to
its inquiry. While it is not possible to predict with any degree of
certainty the ultimate outcome of the inquiry, HarperCollins
believes it was compliant with applicable antitrust and competition
laws.
Other
The Company's operations are subject to tax in various domestic
and international jurisdictions and as a matter of course, the
Company is regularly audited by federal, state and foreign tax
authorities. The Company believes it has appropriately accrued for
the expected outcome of all pending tax matters and does not
currently anticipate that the ultimate resolution of pending tax
matters will have a material adverse effect on its consolidated
financial condition, future results of operations or liquidity.
The Company establishes an accrued liability for legal claims
when the Company determines that a loss is both probable and the
amount of the loss can be reasonably estimated. Once established,
accruals are adjusted from time to time, as appropriate, in light
of additional information. The amount of any loss ultimately
incurred in relation to matters for which an accrual has been
established may be higher or lower than the amounts accrued for
such matters. Legal fees associated with litigation and similar
proceedings that are not expected to provide a benefit in future
periods are expensed as incurred. Any fees, expenses, fines,
penalties, judgments or settlements which might be incurred by the
Company in connection with the various proceedings could affect the
Company's results of operations and financial condition. For the
contingencies disclosed above for which there is at least a
reasonable possibility that a loss may be incurred, other than the
accrual provided, the Company was unable to estimate the amount of
loss or range of loss.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors non-contributory pension plans and retiree
health and life insurance benefit plans covering specific groups of
employees which are closed to new participants (with the exception
of groups covered by collective bargaining agreements). The
benefits payable for the Company's non-contributory pension plans
are based primarily on a formula factoring both an employee's years
of service and pay near retirement. Participant employees are
vested in the pension plans after five years of service. The
Company's 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.
The components of net periodic benefits costs were as
follows:
Postretirement
Pension Benefits Benefits
------------------------------- ------------------
For the three months ended March
31,
----------------------------------------------------
2013 2012 2013 2012
------------- ----------- ---------- -----
(in millions)
Service cost benefits earned during the
period $ 31 $ 25 $ 1 $ 1
Interest costs on projected benefit obligation 41 44 3 4
Expected return on plan assets (47) (46) - -
Amortization of deferred losses 23 12 - -
Other (1) 3 (2) (5)
Net periodic benefits costs $ 47 $ 38 $ 2 $ -
Cash contributions $ 39 $ 16 $ 4 $ 4
Postretirement
Pension Benefits Benefits
------------------------------- ------------------
For the nine months ended March
31,
----------------------------------------------------
2013 2012 2013 2012
------------- ----------- ---------- -----
(in millions)
Service cost benefits earned during the
period $ 94 $ 73 $ 4 $ 4
Interest costs on projected benefit obligation 123 133 10 12
Expected return on plan assets (141) (139) - -
Amortization of deferred losses 71 36 - -
Other 7 8 (5) (14)
Net periodic benefits costs $ 154 $ 111 $ 9 $ 2
Cash contributions $ 65 $ 45 $ 14 $ 14
NOTE 15. SEGMENT INFORMATION
The Company is a diversified global media company, which manages
and reports its businesses in the following six segments:
-- Cable Network Programming , which principally consists of the production
and licensing of programming distributed through cable television systems
and direct broadcast satellite operators primarily in the United States,
Latin America, Europe and Asia.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-- Filmed Entertainment , which principally consists of the production and
acquisition of live-action and animated motion pictures for distribution
and licensing in all formats in all entertainment media worldwide, and
the production and licensing of television programming worldwide.
-- Television , which principally consists of the broadcasting of network
programming in the United States and the operation of 27 full power broadcast
television stations, including 9 duopolies, in the United States (of these
stations, 17 are affiliated with the FOX Broadcasting Company and 10 are
affiliated with Master Distribution Service, Inc. ("MyNetworkTV")).
-- Direct Broadcast Satellite Television , which consists of the distribution
of basic and premium programming services via satellite and cable directly
to subscribers in Italy, Germany and Austria.
-- Publishing , which principally consists of the Company's newspapers and
information services, book publishing and integrated marketing services
businesses. The newspapers and information services business principally
consists of the publication of national newspapers in the United Kingdom,
the publication of approximately 140 newspapers in Australia, the publication
of a metropolitan newspaper and a national newspaper (with international
editions) in the United States and the provision of information services.
The book publishing business consists of the publication of English language
books throughout the world and the integrated marketing services business
consists of the publication of free-standing inserts and the provision
of in-store marketing products and services in the United States and Canada.
-- Other , which principally consists of FOX SPORTS Australia, the leading
sports programming provider in Australia, the Company's digital media
properties and Amplify, the Company's education technology businesses.
The Company's operating segments have been determined in
accordance with the Company's 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 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 Company's consolidated financial
statements by allowing them to evaluate changes in the operating
results of the Company's 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
Company's financial performance. Segment operating income (loss)
before depreciation and amortization also excludes depreciation and
amortization which are also significant components in assessing the
Company's 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 Company's 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 Company's 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).
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the three months For the nine months
ended ended
March 31, March 31,
-------------------------- -----------------------
2013 2012 2013 2012
------------ -------- ------------ --------
(in millions)
Revenues:
Cable Network Programming $ 2,782 $ 2,375 $ 7,790 $ 6,656
Filmed Entertainment 2,014 1,722 5,826 5,563
Television 1,225 1,208 3,716 3,651
Direct Broadcast Satellite Television 1,300 923 3,007 2,792
Publishing 1,938 2,025 6,105 6,224
Other 279 149 655 450
Total revenues $ 9,538 $ 8,402 $ 27,099 $ 25,336
Segment operating income (loss):
Cable Network Programming $ 993 $ 846 $ 2,891 $ 2,503
Filmed Entertainment 289 272 1,072 1,012
Television 196 171 576 493
Direct Broadcast Satellite Television (11) 40 (8) 165
Publishing 85 130 376 458
Other (190) (147) (587) (437)
Total segment operating income 1,362 1,312 4,320 4,194
Impairment and restructuring charges (56) (27) (273) (154)
Equity earnings of affiliates 157 204 521 467
Interest expense, net (276) (258) (809) (773)
Interest income 32 26 100 91
Other, net 2,431 27 5,206 22
Income before income tax expense 3,650 1,284 9,065 3,847
Income tax expense (741) (281) (1,402) (931)
Net income 2,909 1,003 7,663 2,916
Less: Net income attributable to
noncontrolling
interests (55) (66) (195) (184)
Net income attributable to News Corporation
stockholders $ 2,854 $ 937 $ 7,468 $ 2,732
Intersegment revenues, generated primarily by the Filmed
Entertainment segment, of approximately $330 million and $291
million for the three months ended March 31, 2013 and 2012,
respectively, and of approximately $779 million and $824 million
for the nine months ended March 31, 2013 and 2012, respectively,
have been eliminated within the Filmed Entertainment segment.
Intersegment operating profit generated primarily by the Filmed
Entertainment segment of approximately $13 million and $17 million
for the three months ended March 31, 2013 and 2012, respectively,
and of approximately $21 million and $64 million for the nine
months ended March 31, 2013 and 2012, respectively, have been
eliminated within the Filmed Entertainment segment.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2013
------------------------------------------------------------------------------------
Segment operating
income (loss)
Amortization before
Depreciation of cable depreciation
Segment operating and distribution and
income (loss) amortization investments amortization
------------------------- --------------- --------------- -------------------
(in millions)
Cable Network Programming $ 993 $ 53 $ 23 $ 1,069
Filmed Entertainment 289 32 - 321
Television 196 23 - 219
Direct Broadcast Satellite
Television (11) 101 - 90
Publishing 85 118 - 203
Other (190) 30 - (160)
Total $ 1,362 $ 357 $ 23 $ 1,742
For the three months ended March 31, 2012
------------------------------------------------------------------------------------
Segment operating
income (loss)
Amortization before
Depreciation of cable depreciation
Segment operating and distribution and
income (loss) amortization investments amortization
------------------------- --------------- --------------- -------------------
(in millions)
Cable Network Programming $ 846 $ 42 $ 22 $ 910
Filmed Entertainment 272 33 - 305
Television 171 21 - 192
Direct Broadcast Satellite
Television 40 76 - 116
Publishing 130 106 - 236
Other (147) 16 - (131)
Total $ 1,312 $ 294 $ 22 $ 1,628
For the nine months ended March 31, 2013
------------------------------------------------------------------------------------
Segment operating
income (loss)
Amortization before
Depreciation of cable depreciation
Segment operating and distribution and
income (loss) amortization investments amortization
------------------------- --------------- --------------- -------------------
(in millions)
Cable Network Programming $ 2,891 $ 140 $ 67 $ 3,098
Filmed Entertainment 1,072 98 - 1,170
Television 576 66 - 642
Direct Broadcast Satellite
Television (8) 249 - 241
Publishing 376 348 - 724
Other (587) 66 - (521)
Total $ 4,320 $ 967 $ 67 $ 5,354
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended March 31, 2012
------------------------------------------------------------------------------------
Segment operating
income (loss)
Amortization before
Depreciation of cable depreciation
Segment operating and distribution and
income (loss) amortization investments amortization
------------------------- --------------- --------------- -------------------
(in millions)
Cable Network Programming $ 2,503 $ 117 $ 69 $ 2,689
Filmed Entertainment 1,012 95 - 1,107
Television 493 63 - 556
Direct Broadcast Satellite
Television 165 228 - 393
Publishing 458 319 - 777
Other (437) 47 - (390)
Total $ 4,194 $ 869 $ 69 $ 5,132
As of As of
March June
31, 30,
2013 2012
------- -------
(in millions)
Total assets:
Cable Network Programming $17,656 $14,896
Filmed Entertainment 8,642 8,102
Television 6,341 6,110
Direct Broadcast Satellite Television 8,622 2,455
Publishing 11,277 10,913
Other 9,330 9,219
Investments 6,622 4,968
Total assets $68,490 $56,663
Goodwill and Intangible assets, net:
Cable Network Programming $ 9,188 $ 7,626
Filmed Entertainment 2,455 2,531
Television 4,222 4,317
Direct Broadcast Satellite Television 5,965 554
Publishing 4,739 4,586
Other 1,901 693
Total goodwill and intangible assets, net $28,470 $20,307
35
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. ADDITIONAL FINANCIAL INFORMATION
Supplemental Cash Flows Information
For the nine months
ended
March 31,
---------------------------
2013 2012
-------------- ----------
(in millions)
Supplemental cash flows information:
Cash paid for income taxes $ (980) $ (957)
Cash paid for interest (816) (782)
Return of capital from equity method investments 272 190
Payments for equity method investments (890) (204)
Sale of other investments 2 5
Purchase of other investments (65) (203)
Supplemental information on businesses acquired:
Fair value of assets acquired 7,658 862
Cash acquired 775 21
Liabilities assumed (2,293) (72)
Noncontrolling interest (increase) decrease (2,619) 15
Cash paid (3,521) (553)
Fair value of equity instruments issued to third parties - 273
Issuance of subsidiary common units - (273)
Fair value of equity instruments consideration $ - $ -
Other, net
The following table sets forth the components of Other, net
included in the unaudited consolidated statements of
operations:
For the three months For the nine months
ended ended
March 31, March 31,
------------------------------ ------------------------------
2013 2012 2013 2012
----------------- ---------- -------------- ----------
(in millions)
Gain on Sky Deutschland transaction
(a) , (b) $ 2,069 $ - $ 2,069 $ -
Gain on sale of investment in
SKY Network Television Ltd. (a) 321 - 321 -
Gain on Phoenix Satellite Television
transaction (a) 81 - 81 -
Gain on CMH transaction (b) - - 1,245 -
Gain on sale of investment in
NDS (a) - - 1,446 -
Gain on Fox Sports Asia transaction
(b) - - 174 -
Change in fair value of Sky Deutschland
convertible securities (a) - 7 58 (82)
Gain on FPAS transaction (b) - - - 158
Gain on Hathway Cable transaction
(a) - 23 - 23
BSkyB termination fee (a) - - - (63)
Other (40) (3) (188) (14)
Total Other, net $ 2,431 $ 27 $ 5,206 $ 22
(a) See Note 6-Investments
(b) See Note 2-Acquisitions, Disposals and Other Transactions
36
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. SUPPLEMENTAL GUARANTOR INFORMATION
In May 2012, NAI, a 100% owned subsidiary of the Company as
defined in Rule 3-10(h) of Regulation S-X, entered into a credit
agreement (the "Credit Agreement"), among NAI as Borrower, the
Company as Parent Guarantor, the lenders named therein, the initial
issuing banks named therein, JPMorgan Chase Bank, N.A. ("JPMorgan
Chase") and Citibank, N.A. as Co-Administrative Agents, JPMorgan
Chase as Designated Agent and Bank of America, N.A. as Syndication
Agent. The Credit Agreement provides a $2 billion unsecured
revolving credit facility with a sub-limit of $400 million (or its
equivalent in Euros) available for the issuance of letters of
credit and a maturity date of May 2017. Under the Credit Agreement,
the Company may request an increase in the amount of the credit
facility up to a maximum amount of $2.5 billion and the Company may
request that the maturity date be extended for up to two additional
one-year periods. Borrowings are issuable in U.S. dollars only,
while letters of credit are issuable in U.S. dollars or Euros. The
significant terms of the agreement include the requirement that the
Company maintain specific leverage ratios and limitations on
secured indebtedness. Fees under the Credit Agreement will be based
on the Company's long-term senior unsecured non-credit enhanced
debt ratings. Given the current debt ratings, NAI pays a facility
fee of 0.125% and an initial drawn cost of LIBOR plus 1.125%.
The 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
Company's 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.
37
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Operations
For the three months ended March 31, 2013
(in millions)
News
Corporation
News America News Reclassifications and
Incorporated Corporation Non-Guarantor and Eliminations Subsidiaries
-------------- ----------- --------------- ------------------- ------------
Revenues $ 1 $ - $ 9,537 $ - $ 9,538
Expenses (132) - (8,100) - (8,232)
Equity earnings
(losses)
of affiliates 1 - 156 - 157
Interest expense, net (380) (120) (18) 242 (276)
Interest income - 1 273 (242) 32
Earnings (losses) from
subsidiary entities 2,397 2,971 - (5,368) -
Other, net (16) 2 2,445 - 2,431
Income (loss) before
income tax expense 1,871 2,854 4,293 (5,368) 3,650
Income tax (expense)
benefit (309) - (881) 449 (741)
Net income (loss) 1,562 2,854 3,412 (4,919) 2,909
Less: Net
income
attributable
to
noncontrolling
interests - - (55) - (55)
Net income (loss)
attributable
to News Corporation
stockholders $ 1,562 $ 2,854 $ 3,357 $ (4,919) $ 2,854
Comprehensive income
(loss) attributable
to
News Corporation
stockholders $ 1,485 $ 2,407 $ 3,263 $ (4,748) $ 2,407
See notes to supplemental guarantor information
38
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Operations
For the three months ended March 31, 2012
(in millions)
News
Corporation
News America News Reclassifications and
Incorporated Corporation Non-Guarantor and Eliminations Subsidiaries
-------------- -------------- --------------- ------------------- ---------------
Revenues $ 1 $ - $ 8,401 $ - $ 8,402
Expenses (104) - (7,013) - (7,117)
Equity earnings
(losses)
of affiliates (1) - 205 - 204
Interest expense, net (375) 373 (3) (253) (258)
Interest income 1 1 (229) 253 26
Earnings (losses) from
subsidiary entities 128 563 - (691) -
Other, net 15 - 12 - 27
Income (loss) before
income tax expense (335) 937 1,373 (691) 1,284
Income tax (expense)
benefit 73 - (284) (70) (281)
Net income (loss) (262) 937 1,089 (761) 1,003
Less: Net
income
attributable
to
noncontrolling
interests - - (66) - (66)
Net income (loss)
attributable
to News Corporation
stockholders $ (262) $ 937 $ 1,023 $ (761) $ 937
Comprehensive income
(loss) attributable
to
News Corporation
stockholders $ (239) $ 1,351 $ 1,219 $ (980) $ 1,351
See notes to supplemental guarantor information
39
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Operations
For the nine months ended March 31, 2013
(in millions)
News
Corporation
News America News Reclassifications and
Incorporated Corporation Non-Guarantor and Eliminations Subsidiaries
------------ ----------- --------------- ------------------- ------------
Revenues $ 1 $ - $ 27,098 $ - $ 27,099
Expenses (388) - (22,664) - (23,052)
Equity earnings
(losses)
of affiliates (1) - 522 - 521
Interest expense, net (1,143) (354) (29) 717 (809)
Interest income 1 5 811 (717) 100
Earnings (losses) from
subsidiary entities 4,011 7,811 - (11,822) -
Other, net (8) 6 5,208 - 5,206
Income (loss) before
income
tax expense 2,473 7,468 10,946 (11,822) 9,065
Income tax (expense)
benefit (382) - (1,693) 673 (1,402)
Net income (loss) 2,091 7,468 9,253 (11,149) 7,663
Less: Net
income
attributable
to
noncontrolling
interests - - (195) - (195)
Net income (loss)
attributable
to News Corporation
stockholders $ 2,091 $ 7,468 $ 9,058 $ (11,149) $ 7,468
Comprehensive income
(loss)
attributable to News
Corporation
stockholders $ 1,995 $ 7,330 $ 8,883 $ (10,878) $ 7,330
See notes to supplemental guarantor information
40
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Operations
For the nine months ended March 31, 2012
(in millions)
News
Corporation
News America News Reclassifications and
Incorporated Corporation Non-Guarantor and Eliminations Subsidiaries
------------ ----------- --------------- ------------------- ------------
Revenues $ 1 $ - $ 25,335 $ - $ 25,336
Expenses (309) - (20,987) - (21,296)
Equity earnings
(losses)
of affiliates (5) - 472 - 467
Interest expense, net (1,121) (299) (10) 657 (773)
Interest income 3 5 740 (657) 91
Earnings (losses) from
subsidiary entities 290 3,090 - (3,380) -
Other, net 24 (64) 62 - 22
Income (loss) before
income
tax expense (1,117) 2,732 5,612 (3,380) 3,847
Income tax (expense)
benefit 271 - (1,359) 157 (931)
Net income (loss) (846) 2,732 4,253 (3,223) 2,916
Less: Net
income
attributable
to
noncontrolling
interests - - (184) - (184)
Net income (loss)
attributable
to News Corporation
stockholders $ (846) $ 2,732 $ 4,069 $ (3,223) $ 2,732
Comprehensive income
(loss)
attributable to News
Corporation
stockholders $ (724) $ 2,065 $ 3,604 $ (2,880) $ 2,065
See notes to supplemental guarantor information
41
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Balance Sheet
At March 31, 2013
(in millions)
News
Corporation
News America News Reclassifications and
Incorporated Corporation Non-Guarantor and Eliminations Subsidiaries
------------ ----------- --------------- ------------------- ---------------
ASSETS:
Current assets:
Cash and cash
equivalents $ 384 $ 5,034 $ 3,906 $ - $ 9,324
Receivables,
net 7 - 7,129 - 7,136
Inventories,
net - - 3,476 - 3,476
Other 26 6 825 - 857
Total current
assets 417 5,040 15,336 - 20,793
Non-current assets:
Receivables 19 - 412 - 431
Inventories,
net - - 5,002 - 5,002
Property,
plant and
equipment,
net 127 - 5,857 - 5,984
Intangible
assets, net - - 8,331 - 8,331
Goodwill - - 20,139 - 20,139
Other 363 - 825 - 1,188
Investments:
Investments
in
associated
companies
and other
investments 84 54 6,484 - 6,622
Intragroup
investments 54,556 59,535 - (114,091) -
Total investments 54,640 59,589 6,484 (114,091) 6,622
TOTAL ASSETS $ 55,566 $ 64,629 $ 62,386 $ (114,091) $ 68,490
LIABILITIES AND EQUITY
Current
liabilities:
Borrowings $ 157 $ - $ - $ - $ 157
Other current
liabilities 528 197 10,171 - 10,896
Total current liabilities 685 197 10,171 - 11,053
Non-current liabilities:
Borrowings 16,029 - 288 - 16,317
Other
non-current
liabilities 875 - 6,351 - 7,226
Intercompany 28,332 34,368 (62,700) - -
Redeemable noncontrolling
interests - - 645 - 645
Total equity 9,645 30,064 107,631 (114,091) 33,249
TOTAL LIABILITIES AND
EQUITY $ 55,566 $ 64,629 $ 62,386 $ (114,091) $ 68,490
See notes to supplemental guarantor information
42
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Balance Sheet
At June 30, 2012
(in millions)
News
Corporation
News America News Reclassifications and
Incorporated Corporation Non-Guarantor and Eliminations Subsidiaries
--------------- -------------- --------------- ------------------- ---------------
ASSETS
Current Assets:
Cash and cash
equivalents $ 561 $ 6,005 $ 3,060 $ - $ 9,626
Receivables,
net 1 9 6,598 - 6,608
Inventories,
net - - 2,595 - 2,595
Other 17 14 588 - 619
Total current
assets 579 6,028 12,841 - 19,448
Non-current assets:
Receivables 19 - 368 - 387
Inventories,
net - - 4,596 - 4,596
Property,
plant and
equipment,
net 119 - 5,695 - 5,814
Intangible
assets, net - - 7,133 - 7,133
Goodwill - - 13,174 - 13,174
Other 334 2 807 - 1,143
Investments:
Investments
in
associated
companies
and other
investments 95 39 4,834 - 4,968
Intragroup
investments 49,266 49,953 - (99,219) -
Total investments 49,361 49,992 4,834 (99,219) 4,968
TOTAL ASSETS $ 50,412 $ 56,022 $ 49,448 $ (99,219) $ 56,663
LIABILITIES AND EQUITY
Current
liabilities:
Borrowings $ 273 $ - $ - $ - $ 273
Other current
liabilities 510 - 8,834 - 9,344
Total current liabilities 783 - 8,834 - 9,617
Non-current liabilities:
Borrowings 15,182 - - - 15,182
Other
non-current
liabilities 384 - 5,654 - 6,038
Intercompany 27,470 31,338 (58,808) - -
Redeemable noncontrolling
interests - - 641 - 641
Total equity 6,593 24,684 93,127 (99,219) 25,185
TOTAL LIABILITIES AND
EQUITY $ 50,412 $ 56,022 $ 49,448 $ (99,219) $ 56,663
See notes to supplemental guarantor information
43
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Cash Flows
For the nine months ended March 31, 2013
(in millions)
News
News Reclassifications Corporation
America News and and
Incorporated Corporation Non-Guarantor Eliminations Subsidiaries
--------------- -------------- --------------- ------------------- ---------------
Operating
activities:
Net cash provided
by
(used in)
operating
activities $ (869) $ 909 $ 2,723 $ - $ 2,763
Investing
activities:
Property, plant
and
equipment, net of
acquisitions (16) - (611) - (627)
Investments (6) (15) (3,406) - (3,427)
Proceeds from
dispositions - - 2,670 - 2,670
Net cash provided
by
(used in)
investing
activities (22) (15) (1,347) - (1,384)
Financing
activities:
Borrowings 987 - 290 - 1,277
Repayment of
borrowings (273) - (716) - (989)
Issuance of shares - 170 - - 170
Repurchase of
shares - (1,834) - - (1,834)
Dividends paid - (201) (183) - (384)
Other, net - - 70 - 70
Purchase of
subsidiary
shares from
noncontrolling
interests - - (9) - (9)
Net cash provided
by
(used in)
financing
activities 714 (1,865) (548) - (1,699)
Net increase
(decrease)
in cash and cash
equivalents (177) (971) 828 - (320)
Cash and cash
equivalents,
beginning of
period 561 6,005 3,060 - 9,626
Exchange movement
on
opening cash
balance - - 18 - 18
Cash and cash
equivalents,
end of period $ 384 $ 5,034 $ 3,906 $ - $ 9,324
See notes to supplemental guarantor information
44
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NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Cash Flows
For the nine months ended March 31, 2012
(in millions)
News
News Reclassifications Corporation
America News and and
Incorporated Corporation Non-Guarantor Eliminations Subsidiaries
--------------- -------------- --------------- ------------------- ---------------
Operating
activities:
Net cash provided
by
(used in)
operating
activities $ 413 $ 2,469 $ (161) $ - $ 2,721
Investing
activities:
Property, plant
and
equipment, net of
acquisitions (13) - (638) - (651)
Investments (12) - (732) - (744)
Proceeds from
dispositions 7 11 390 - 408
Net cash (used in)
provided
by investing
activities (18) 11 (980) - (987)
Financing
activities:
Repayment of
borrowings - - (32) - (32)
Issuance of shares - 87 - - 87
Repurchase of
shares - (3,294) - - (3,294)
Dividends paid - (245) (78) - (323)
Net cash (used in)
provided
by financing
activities - (3,452) (110) - (3,562)
Net (decrease)
increase
in cash and cash
equivalents 395 (972) (1,251) - (1,828)
Cash and cash
equivalents,
beginning of
period 360 7,816 4,504 - 12,680
Exchange movement
on
opening cash
balance - - (166) - (166)
Cash and cash
equivalents,
end of period $ 755 $ 6,844 $ 3,087 $ - $ 10,686
See notes to supplemental guarantor information
45
Table of Contents
NEWS CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Notes to Supplemental Guarantor Information
(1) Investments in the Company's 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 company's investment account and earnings.
(2) The guarantees of NAI's 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.
46
Table of Contents
ITEM 2. MANAGEMENT'S 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 Corporation's financial condition or results
of operations. The readers of this document are cautioned that any
forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. More information regarding
these risks, uncertainties and other factors is set forth under the
heading Part II "Other Information, " Item 1A "Risk Factors" in
this report. News Corporation does not ordinarily make projections
of its future operating results and undertakes no obligation (and
expressly disclaims any obligation) to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
Readers should carefully review this document and the other
documents filed by News Corporation with the Securities and
Exchange Commission ("SEC"). This section should be read together
with the unaudited consolidated financial statements of News
Corporation and related notes set forth elsewhere herein and News
Corporation's Annual Report on Form 10-K for the fiscal year ended
June 30, 2012 as filed with the SEC on August 14, 2012 and as
amended on October 1, 2012 (the "2012 Form 10-K").
INTRODUCTION
Management's discussion and analysis of financial condition and
results of operations is intended to help provide an understanding
of News Corporation and its subsidiaries' (together, "News
Corporation" or the "Company") financial condition, changes in
financial condition and results of operations. This discussion is
organized as follows:
-- Overview of the Company's Business -This section provides a general description
of the Company's businesses, as well as developments that have occurred
to date during fiscal 2013 that the Company believes are important in
understanding its results of operations and financial condition or to
disclose known trends.
-- Results of Operations -This section provides an analysis of the Company's
results of operations for the three and nine months ended March 31, 2013
and 2012. This analysis is presented on both a consolidated and a segment
basis. In addition, a brief description is provided of significant transactions
and events that have an impact on the comparability of the results being
analyzed.
-- Liquidity and Capital Resources - This section provides an analysis of
the Company's cash flows for the nine months ended March 31, 2013 and
2012. Included in the discussion of outstanding debt is a discussion of
the amount of financial capacity available to fund the Company's future
commitments and obligations, as well as a discussion of other financing
arrangements.
OVERVIEW OF THE COMPANY'S BUSINESS
The Company is a diversified global media company, which manages
and reports its businesses in the following six segments:
-- Cable Network Programming , which principally consists of the production
and licensing of programming distributed through cable television systems
and direct broadcast satellite operators primarily in the United States,
Latin America, Europe and Asia.
-- Filmed Entertainment , which principally consists of the production and
acquisition of live-action and animated motion pictures for distribution
and licensing in all formats in all entertainment media worldwide, and
the production and licensing of television programming worldwide.
-- Television , which principally consists of the broadcasting of network
programming in the United States and the operation of 27 full power broadcast
television stations, including 9 duopolies, in the United States (of these
stations, 17 are affiliated with the FOX Broadcasting Company ("FOX")
and 10 are affiliated with Master Distribution Service, Inc. ("MyNetworkTV")).
-- Direct Broadcast Satellite Television , which consists of the distribution
of basic and premium programming services via satellite and cable directly
to subscribers in Italy, Germany and Austria.
47
Table of Contents
-- Publishing , which principally consists of the Company's newspapers and
information services, book publishing and integrated marketing services
businesses. The newspapers and information services business principally
consists of the publication of national newspapers in the United Kingdom,
the publication of approximately 140 newspapers in Australia, the publication
of a metropolitan newspaper and a national newspaper (with international
editions) in the United States and the provision of information services.
The book publishing business consists of the publication of English language
books throughout the world and the integrated marketing services business
consists of the publication of free-standing inserts and the provision
of in-store marketing products and services in the United States and Canada.
-- Other , which principally consists of FOX SPORTS Australia, the leading
sports programming provider in Australia, the Company's digital media
properties and Amplify, the Company's education technology businesses.
Television and Cable Network Programming
The Company's television operations primarily consist of FOX,
MyNetworkTV and the 27 television stations owned by the Company. In
April 2013, the Company increased its television station ownership
to 29 full power stations, resulting in ownership and operation of
duopolies in 10 designated market areas.
The television operations derive revenues primarily from the
sale of advertising and to a lesser extent retransmission consent
revenue. Adverse changes in general market conditions for
advertising may affect revenues. The U.S. television broadcast
environment is highly competitive and the primary methods of
competition are the development and acquisition of popular
programming. Program success is measured by ratings, which are an
indication of market acceptance, with the top rated programs
commanding the highest advertising prices. FOX is a broadcast
network and MyNetworkTV is a programming distribution service,
airing original and off-network programming. FOX and MyNetworkTV
compete with broadcast networks, such as ABC, CBS, NBC and The CW
Television Network, independent television stations, cable and
Direct Broadcast Satellite Television program services, as well as
other media, including DVDs, Blu-rays, video games, print and the
Internet for audiences, programming and, in the case of FOX,
advertising revenues. In addition, FOX and MyNetworkTV compete with
the other broadcast networks and other programming distribution
services to secure affiliations with independently owned television
stations in markets across the United States. ABC, NBC and CBS each
broadcasts a significantly greater number of hours of programming
than FOX and, accordingly, may be able to designate or change time
periods in which programming is to be broadcast with greater
flexibility than FOX. In addition, future technological
developments may affect competition within the television
marketplace.
U.S. law governing retransmission consent provides a mechanism
for the television stations owned by the Company to seek and obtain
payment from multi-channel video programming distributors who carry
the Company's broadcast signals. Retransmission consent revenue
consists of per subscriber-based compensatory fees paid to the
Company by cable and satellite distribution systems that distribute
the Company's television stations affiliated with FOX and
MyNetworkTV. The Company also receives compensation from
independently-owned television stations that are affiliated with
FOX and MyNetworkTV.
The television stations owned and operated by the Company
compete for programming, audiences and advertising revenues with
other television stations and cable networks in their respective
coverage areas and, in some cases, with respect to programming,
with other station groups, and in the case of advertising revenues,
with other local and national media. The competitive position of
the television stations owned by the Company is largely influenced
by the quality and strength of FOX and MyNetworkTV programming,
and, in particular, the prime-time viewership of the respective
network.
The Company's U.S. cable network operations primarily consist of
the Fox News Channel ("FOX News"), FX Networks, LLC ("FX"),
Regional Sports Networks ("RSNs"), the National Geographic
Channels, SPEED and the Big Ten Network. The Company's
international cable networks consist of the Fox International
Channels ("FIC") and STAR. FIC produces and distributes
entertainment, factual, sports, and movie channels through
distribution channels in Europe, Africa, Asia and Latin America
using several brands, including Fox, Fox Crime, Fox Life and
National Geographic Channel. STAR's owned and affiliated channels
are distributed in the following countries and regions: India;
Greater China; Indonesia; the rest of South East Asia; Pakistan;
the Middle East and Africa; the United Kingdom and Europe; and
North America.
Generally, the Company's cable networks, which target various
demographics, derive a majority of their revenues from monthly
affiliate fees received from cable television systems and direct
broadcast satellite operators based on the number of their
subscribers. Affiliate fee revenues are net of the amortization of
cable distribution investments (capitalized fees paid to
multi-channel video programming distributors to typically
facilitate the carriage of a cable network). The Company defers the
cable distribution investments and amortizes the amounts on a
straight-line basis over the contract period. Cable television and
direct broadcast satellite are currently the predominant means of
distribution of the Company's program services in the United
States. Internationally, distribution technology varies region by
region.
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The Company's cable networks compete for carriage on cable
television systems, direct broadcast satellite systems and other
distribution systems with other program services. A primary focus
of competition is for distribution of the Company's cable network
channels that are not already distributed by particular cable
television or direct broadcast satellite systems. For such program
services, distributors make decisions on the use of bandwidth based
on various considerations, including amounts paid by programmers
for launches, subscription fees payable by distributors and appeal
to the distributors' subscribers.
The most significant operating expenses of the Television
segment and the Cable Network Programming segment are the
acquisition and production expenses related to programming and the
expenses related to operating the technical facilities of the
broadcaster or cable network. Other expenses include promotional
expenses related to improving the market visibility and awareness
of the broadcaster or cable network and its programming. Additional
expenses include sales commissions paid to the in-house advertising
sales force, as well as salaries, employee benefits, rent and other
routine overhead expenses.
The Company has several multi-year sports rights agreements,
including contracts with the National Football League ("NFL")
through fiscal 2023, contracts with the National Association of
Stock Car Auto Racing ("NASCAR") for certain races and exclusive
rights for certain ancillary content through calendar year 2022, a
contract with Major League Baseball ("MLB") through calendar year
2021 and other sports rights contracts. These contracts provide the
Company with the broadcast rights to certain U.S. national sporting
events during their respective terms. The costs of these sports
contracts are charged to expense based on the ratio of each
period's operating profit to estimated total operating profit for
the remaining term of the contract.
The profitability of these long-term U.S. national sports
contracts is based on the Company's best estimates as of March 31,
2013 of attributable revenues and costs; such estimates may change
in the future and such changes may be significant. Should revenues
decline from estimates applied as of March 31, 2013, additional
amortization of rights may be recorded. Should revenues improve as
compared to estimated revenues, the Company may have an improved
operating profit related to the contract, which may be recognized
over the remaining contract term.
While the Company seeks to ensure compliance with federal
indecency laws and related Federal Communications Commission
("FCC") regulations, the definition of "indecency" is subject to
interpretation and there can be no assurance that the Company will
not broadcast programming that is ultimately determined by the FCC
to violate the prohibition against indecency. Such programming
could subject the Company to regulatory review or investigation,
fines, adverse publicity or other sanctions, including the loss of
station licenses.
Filmed Entertainment
The Filmed Entertainment segment derives revenue from the
production and distribution of live-action and animated motion
pictures and television series. In general, motion pictures
produced or acquired for distribution by the Company are exhibited
in U.S. and foreign theaters, followed by home entertainment,
including sale and rental of DVDs and Blu-rays, video-on-demand and
pay-per-view television, on-line and mobile distribution, premium
subscription television, network television and basic cable and
syndicated television exploitation. Television series initially
produced for the networks and first-run syndication are generally
licensed to domestic and international markets concurrently and
subsequently released in seasonal DVD and Blu-ray box sets and made
available via digital distribution platforms. More successful
series are later syndicated in domestic markets. The length of the
revenue cycle for television series will vary depending on the
number of seasons a series remains in active production and,
therefore, may cause fluctuations in operating results. License
fees received for television exhibition (including international
and U.S. premium television and basic cable television) are
recorded as revenue in the period that licensed films or programs
are available for such exhibition, which may cause substantial
fluctuations in operating results.
The revenues and operating results of the Filmed Entertainment
segment are significantly affected by the timing of the Company's
theatrical and home entertainment releases, the number of its
original and returning television series that are aired by
television networks and the number of its television series in
off-network syndication. Theatrical and home entertainment release
dates are determined by several factors, including timing of
vacation and holiday periods and competition in the marketplace.
The distribution windows for the release of motion pictures
theatrically and in various home entertainment products and
services (including subscription rentals, rental kiosks and
Internet streaming services), have been compressing and may
continue to change in the future. A further reduction in timing
between theatrical and home entertainment releases could adversely
affect the revenues and operating results of this segment.
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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 investor's interest in the profits or losses
incurred on the film. Consistent with the requirements of Financial
Accounting Standards Board ("FASB") Accounting Standards
Codification ("ASC") 926 "Entertainment-Films" ("ASC 926"), the
estimate of a third-party investor's interest in profits or losses
incurred on the film is determined by reference to the ratio of
actual revenue earned to date in relation to total estimated
ultimate revenues.
Operating costs incurred by the Filmed Entertainment segment
include: exploitation costs, primarily theatrical prints and
advertising and home entertainment marketing and manufacturing
costs; amortization of capitalized production, overhead and
interest costs; and participations and talent residuals. Selling,
general and administrative expenses include salaries, employee
benefits, rent and other routine overhead.
The Company competes with other film studios, such as Disney,
Paramount, Sony, Universal, Warner Bros. and other independent film
producers in the production and distribution of motion pictures,
DVDs and Blu-rays. As a producer and distributor of television
programming, the Company competes with studios, television
production groups and independent producers and syndicators, such
as Disney, Sony, NBC Universal, Warner Bros. and Paramount
Television, to sell programming both domestically and
internationally. The Company also competes to obtain creative
talent and story properties, which are essential to the success of
the Company's filmed entertainment businesses.
Direct Broadcast Satellite Television
The Direct Broadcast Satellite Television ("DBS") segment's
operations consist of SKY Italia and Sky Deutschland, which provide
basic and premium programming services via satellite and cable
directly to subscribers in Italy, Germany and Austria. The DBS
segment derives revenues principally from subscriber fees. The
Company believes that the quality and variety of programming, audio
and interactive programming including personal video recorders,
quality of picture including high definition channels, access to
service, customer service and price are the key elements for
gaining and maintaining market share. The DBS segment's competition
includes companies that offer video, audio, interactive
programming, telephony, data and other information and
entertainment services, including broadband Internet providers,
digital terrestrial transmission ("DTT") services, wireless
companies and companies that are developing new media
technologies.
The DBS segment's most significant operating expenses are those
related to the acquisition of entertainment, movie and sports
programming and subscribers and the expenses related to operating
the technical facilities. Operating expenses related to sports
programming are generally recognized over the course of the related
sport season, which may cause fluctuations in the operating results
of this segment.
The continued challenging economic environment in Europe has
contributed to a reduction in consumer spending and has posed
challenges for subscriber retention and growth. If this trend
continues, it could have a material effect on the operating results
of the DBS segment.
Publishing
The Company's Publishing segment consists of the Company's
newspapers and information services, book publishing and integrated
marketing services businesses and the related digital formats.
Revenue is derived from the sale of advertising space,
newspapers, books and subscriptions, as well as licensing. Adverse
changes in general market conditions for advertising may affect
revenues. Circulation and subscription revenues can be greatly
affected by changes in the prices of the Company's and/or
competitors' products, as well as by promotional activities.
Operating expenses include costs related to paper, production,
distribution, editorial, commissions and royalties. Selling,
general and administrative expenses include promotional expenses,
salaries, employee benefits, rent and other routine overhead.
The Publishing segment's advertising volume, circulation, and
the price of paper are the key variables whose fluctuations can
have a material effect on the Company's operating results and cash
flow. The Company has to anticipate the level of advertising
volume, circulation and paper prices in managing its businesses to
maximize operating profit during expanding and contracting
economic
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cycles. The Company continues to be exposed to risks associated
with paper used for printing. Paper is a basic commodity and its
price is sensitive to the balance of supply and demand. The
Company's expenses are affected by the cyclical increases and
decreases in the price of paper. The Publishing segment's products
compete for readership and advertising with local and national
competitors and also compete with other media alternatives in their
respective markets. Competition for circulation and subscriptions
is based on the content of the products provided, service, pricing
and, from time to time, various promotions. The success of these
products depends upon advertisers' judgments as to the most
effective use of their advertising budgets. Competition for
advertising is based upon the reach of the products, advertising
rates and advertiser results. Such judgments are based on factors
such as cost, availability of alternative media, distribution and
quality of readership demographics.
Like other newspaper publishing groups, the Company faces
challenges to its traditional print business model from new media
formats and shifting consumer preferences. The Company is also
exposed to the impact of long-term structural movements in
advertising spending in particular, the move in classified
advertising from print to digital. These new media formats could
impact the Company's performance, positively or negatively.
As a multi-platform news provider, the Company recognizes the
importance of maximizing revenues from new media, both in terms of
paid-for content and in new advertising models, and continues to
invest in its digital products. The development of technologies
such as smartphones, tablets and similar devices and their related
applications provides opportunities for the Company to make
available its journalism to a new audience of readers, introduce
new or different pricing schemes, develop its products to continue
to attract advertisers and/or affect the relationship between
publisher and consumer. The Company continues to develop and
implement strategies to exploit its content in new media channels,
including the introduction of paywalls around its newspaper
websites.
Other
The Other segment consists primarily of:
FOX SPORTS Australia
FOX SPORTS Australia is Australia's leading sports programmer
based on total subscribers. FOX SPORTS Australia is focused on live
national and international sports events and is distributed via
long-term carriage agreements with various pay-TV providers (mainly
Foxtel) in Australia. FOX SPORTS Australia provides featured
original and licensed premium sports content tailored to the
Australian market. FOX SPORTS Australia's channels provide premium
compelling live broadcasts, including almost every game of the
highly popular Australian Football League.
Prior to November 2012, the Company owned a 50% interest in FOX
SPORTS Australia, which the Company accounted for as an equity
investment. In November 2012, the Company acquired Consolidated
Media Holdings Limited ("CMH"), a media investment company that
owned the remaining 50% interest in FOX SPORTS Australia. As a
result of the CMH acquisition, the Company's ownership interest in
FOX SPORTS Australia increased to 100% and, accordingly, the
results of FOX SPORTS Australia are included in the Company's
combined results of operations beginning in November 2012.
Digital Media Group
The Company sells advertising, sponsorships and subscription
services on the Company's various digital media properties,
including REA Group Limited ("REA"), the Australian online real
estate advertising service. Significant expenses associated with
the Company's digital media properties include development costs,
advertising and promotional expenses, salaries, employee benefits
and other routine overhead.
Education Group
Amplify, the Company's digital education business focused on the
K-12 learning market, has three businesses: analytics and
assessment, digital content and curriculum and mobile distribution
systems designed for education. Significant expenses associated
with the Company's digital education business include salaries,
employee benefits and other routine overhead.
Other Business Developments
In July 2011, the Company announced that it would close its
publication, The News of the World , after allegations of phone
hacking and payments to public officials. As a result of
management's approval of the shutdown of The News of the World ,
the Company has reorganized portions of the U.K. newspaper business
and has recorded restructuring charges in fiscal 2013 and 2012
primarily for
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termination benefits and certain organizational restructuring at
the U.K. newspapers. (See Note 4 - Restructuring Programs) The
Company is subject to several ongoing investigations by U.K. and
U.S. regulators and governmental authorities relating to phone
hacking, illegal data access and inappropriate payments to
officials at The News of the World and The Sun and related matters
(the "U.K. Newspaper Matters"). The Company is cooperating with
these investigations. In addition, the Company has admitted
liability in many civil cases related to the phone hacking
allegations and has settled many cases. The Company created an
independently-chaired Management & Standards Committee (the
"MSC"), which operates independently from NI Group Limited ("News
International") and has full authority to ensure cooperation with
all relevant investigations and inquiries into the U.K. Newspaper
Matters and all other related issues. The MSC conducts its own
internal investigation where appropriate. The MSC has an
independent Chairman, Lord Grabiner QC, and reports directly to
Gerson Zweifach, Senior Executive Vice President and Group General
Counsel of the Company. Mr. Zweifach reports to the independent
members of the Board of Directors (the "Board") through their
representative Viet Dinh, an independent director and Chairman of
the Company's Nominating and Corporate Governance Committee. The
independent directors of the Board have retained independent
outside counsel and are actively engaged in these matters. The MSC
conducted an internal investigation of the three other titles at NI
Group Limited ("News International") and engaged independent
outside counsel to advise it on these investigations and all other
matters it handles. As a result of these matters, News
International has instituted governance reforms and issued certain
enhanced policies to its employees.
On June 28, 2012, the Company announced its intent to pursue the
separation of its business into two separate independent public
companies, one of which will hold the Company's global media and
entertainment businesses and the other, New Newscorp LLC ("New News
Corporation"), which will hold the businesses comprising the
Company's newspapers, information services and integrated marketing
services, digital real estate services, book publishing, digital
education and sports programming and pay-TV distribution in
Australia. The Company has announced that it intends to change its
name to Twenty-First Century Fox, Inc. ("21st Century Fox") after
the separation, subject to stockholder approval and other
conditions to the separation. On December 4, 2012, the Company's
board of directors authorized management to proceed with the
proposed distribution, subject to the satisfaction or waiver of
certain conditions and the board of directors' ongoing
consideration of the transaction and its final approval, which may
not be granted.
To effect the distribution, the Company will first undertake an
internal reorganization. Following the internal reorganization, the
Company will distribute all of the shares of New News Corporation's
common stock to its stockholders on a pro rata basis. After the
distribution, the Company will not own any equity interest in New
News Corporation, and New News Corporation will operate
independently from the Company.
In connection with the separation, on December 21, 2012, New
News Corporation filed with the SEC an initial Form 10 registration
statement, which has been amended, and, on April 30, 2013, the
Company filed with the SEC a definitive proxy statement on Schedule
14A. The Company's stockholders will not be required to vote to
approve the distribution. However, in order to effectuate the
distribution in the manner discussed in the Form 10 registration
statement, the Company will be required to amend its Restated
Certificate of Incorporation, and the Company will hold a Special
Meeting on June 11, 2013 in connection therewith. The Company has
also applied for certain regulatory approvals and tax rulings
required to enable the separation to be completed as described.
There can be no assurances given that the separation of the
Company's businesses as described will occur.
In July 2012, the Company acquired Thomas Nelson, Inc. ("Thomas
Nelson"), one of the leading Christian book publishers in the U.S.,
for approximately $200 million in cash.
In July 2012, the Company sold its 49% investment in NDS Group
Limited ("NDS") to Cisco Systems Inc. for approximately $1.9
billion in total consideration.
In November 2012, the Company acquired a controlling 51%
ownership stake in Eredivisie Media & Marketing CV ("EMM") for
approximately $350 million, of which $325 million was cash and $25
million was contingent consideration. EMM is a media company that
holds the collective media and sponsorship rights of the Dutch
Premier League. The remaining 49% of EMM is owned by the Dutch
Premier League and the global TV production company Endemol.
In November 2012, the Company acquired the remaining 50%
interest in Fox Sports Asia (formerly ESPN STAR Sports) that it did
not already own for approximately $220 million, net of cash
acquired. Fox Sports Asia is a leading sports broadcaster in Asia
and the Company now, through its wholly owned subsidiaries, owns
100% of Fox Sports Asia.
In November 2012, the Company acquired Consolidated Media
Holdings Ltd. ("CMH"), a media investment company that operates in
Australia, for approximately $2 billion in cash and assumed debt of
approximately $235 million. CMH owned a 25% interest in Foxtel
through its 50% interest in FOX SPORTS Australia. The remaining 50%
of Foxtel is owned by Telstra
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Corporation Limited, one of Australia's leading
telecommunications companies. The acquisition doubled the Company's
stakes in FOX SPORTS Australia and Foxtel to 100% and 50%,
respectively. Accordingly, the results of FOX SPORTS Australia are
included in the Company's unaudited consolidated results of
operations beginning in November 2012. Prior to November 2012, the
Company accounted for its investment in FOX SPORTS Australia under
the equity method of accounting. The Company's investment in Foxtel
is accounted for under the equity method of accounting.
In December 2012, the Company acquired a 49% equity interest in
the Yankees Entertainment and Sports Network ("YES"), a RSN, for
approximately $584 million and simultaneous with the closing of
this transaction the Company paid approximately $250 million of
upfront costs on behalf of YES. Under the purchase agreement, the
Company may acquire an additional stake in YES that could bring its
ownership to 80%.
In December 2012, the Company acquired SportsTime Ohio, a RSN
serving the Cleveland, Ohio market, for an estimated total purchase
price of approximately $285 million, of which $135 million was in
cash. The balance of the purchase price represents the fair value
of deferred payments and payments that are contingent upon
achievement of certain performance objectives.
During the three months ended March 31, 2013, the Company
acquired, through a combination of a private placement and a rights
offering, approximately 92 million additional shares of Sky
Deutschland increasing its ownership to approximately 55%. The
aggregate cost of the shares acquired by the Company was
approximately EUR410 million (approximately $550 million). As a
result of these transactions, the results of Sky Deutschland are
included in the Company's unaudited consolidated results of
operations beginning in January 2013.
In March 2013, the Company sold its 44% equity interest in SKY
Network Television Ltd. for approximately $675 million.
RESULTS OF OPERATIONS
Results of Operations-For the three and nine months ended March
31, 2013 versus the three and nine months ended March 31, 2012
The following table sets forth the Company's operating results
for the three and nine months ended March 31, 2013 as compared to
the three and nine months ended March 31, 2012.
For the three months
ended For the nine months ended
March 31, March 31,
------------------------------- ---------------------------------------
2013 2012 % Change 2013 2012 % Change
---------- ------- -------- ------------- --------- --------
(in millions, except %)
Revenues $ 9,538 $ 8,402 14% $ 27,099 $ 25,336 7%
Operating expenses (6,114) (5,216) 17% (16,831) (15,552) 8%
Selling, general and
administrative (1,705) (1,580) 8% (4,981) (4,721) 6%
Depreciation and
amortization (357) (294) 21% (967) (869) 11%
Impairment and
restructuring
charges (56) (27) ** (273) (154) 77%
Equity earnings of
affiliates 157 204 (23)% 521 467 12%
Interest expense, net (276) (258) 7% (809) (773) 5%
Interest income 32 26 23% 100 91 10%
Other, net 2,431 27 ** 5,206 22 **
Income before income
tax
expense 3,650 1,284 ** 9,065 3,847 **
Income tax expense (741) (281) ** (1,402) (931) 51%
Net income 2,909 1,003 ** 7,663 2,916 **
Less: Net
income
attributable
to
noncontrolling
interests (55) (66) (17)% (195) (184) 6%
Net income
attributable
to News Corporation
stockholders $ 2,854 $ 937 ** $ 7,468 $ 2,732 **
** not meaningful
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Overview - The Company's revenues increased 14% and 7% for the
three and nine months ended March 31, 2013, respectively, as
compared to the corresponding periods of fiscal 2012, primarily due
to higher net affiliate and advertising revenues at the Cable
Network Programming segment, higher worldwide theatrical revenues
at the Filmed Entertainment segment and higher revenues at the
Direct Broadcast Satellite Television segment resulting from the
consolidation of Sky Deutschland.
Operating expenses increased 17% and 8% for the three and nine
months ended March 31, 2013, respectively, as compared to the
corresponding periods of fiscal 2012, primarily due to the
inclusion of expenses resulting from the consolidations of FOX
SPORTS Australia, Fox Sports Asia and Sky Deutschland and the
acquisitions of Thomas Nelson and EMM (the "Acquisitions"). Also
contributing to the increase was higher sports and entertainment
programming costs and marketing costs at the Cable Network
Programming segment and higher film production, participation and
releasing costs at the Filmed Entertainment segment. The increase
in operating expenses for the nine months ended March 31, 2013 also
reflects the inclusion of expenses resulting from the consolidation
of Fox Pan American Sports ("FPAS") at the Cable Network
Programming segment and higher sports programming costs at the DBS
segment.
Selling, general and administrative expenses increased 8% and 6%
for the three and nine months ended March 31, 2013, respectively,
as compared to the corresponding periods of fiscal 2012, primarily
due to the Acquisitions, costs related to the proposed separation
of the Company's publishing and media and entertainment businesses
into two distinct publicly traded companies ("Separation costs") of
$25 million and $53 million, respectively, and higher product
development costs at Amplify. The increases for the three months
ended March 31, 2013 were partially offset by a decrease of
approximately $21 million in legal and professional fees related to
The News of the World investigations and litigation and costs for
related civil settlements as compared to the corresponding period
of fiscal 2012.
Depreciation and amortization increased 21% and 11% for the
three and nine months ended March 31, 2013, respectively, as
compared to the corresponding periods of fiscal 2012, primarily due
to the Acquisitions and higher expenses at the Publishing
segment.
Impairment and restructuring charges - At the end of fiscal
2012, the Company identified certain businesses as held for sale.
During the nine months ended March 31, 2013, the Company recorded a
non-cash impairment charge of $35 million related to its assets
held for sale to reduce the carrying value of these assets to
estimated fair value less cost to sell.
During the three and nine months ended March 31, 2013, the
Company recorded restructuring charges of approximately $56 million
and $238 million, respectively, of which $52 million and $227
million, respectively, related to the newspaper businesses. The
restructuring charges primarily relate to the reorganization of the
Australian newspaper businesses which was announced at the end of
fiscal 2012 and the continued reorganization of the U.K. newspaper
business. The restructuring charges recorded are primarily for
termination benefits in Australia and contract termination payments
in the U.K.
During the three and nine months ended March 31, 2012, the
Company recorded restructuring charges of approximately $17 million
and $144 million, respectively, of which $12 million and $132
million, respectively, related to the newspaper businesses. The
Company reorganized portions of the newspaper businesses and
recorded restructuring charges primarily for termination benefits
as a result of the shutdown of The News of the World, certain
organizational restructurings at other newspapers and the shutdown
of a regional newspaper. As a result of the shutdown of the
regional newspaper, the Company has written-off associated
intangible assets of approximately $10 million in the three and
nine months ended March 31, 2012.
Equity earnings of affiliates - Equity earnings of affiliates
decreased $47 million for the three months ended March 31, 2013, as
compared to the corresponding period of fiscal 2012, primarily due
to lower gains on the sale of a portion of the Company's British
Sky Broadcasting Group plc ("BSkyB") investment in accordance with
its share repurchase program. This decrease was partially offset by
the absence of equity losses due to the consolidation of Sky
Deutschland. Gains from the BSkyB sales totaled $11 million in the
three months ended March 31, 2013 as compared to $111 million in
the corresponding period of fiscal 2012.
Equity earnings of affiliates increased $54 million for the nine
months ended March 31, 2013, as compared to the corresponding
period of fiscal 2012, primarily due to higher gains on the sale of
a portion of the Company's BSkyB investment, improved results from
BSkyB and a reduction in equity losses resulting from the
consolidation of Sky Deutschland. Gains from the BSkyB sales
totaled $217 million in the nine months ended March 31, 2013 as
compared to $155 million in the corresponding period of fiscal
2012. These increases in equity earnings of affiliates were
partially offset by lower contributions from Hulu LLC ("Hulu"),
resulting from the redemption of Providence Equity Partners' equity
interest in October 2012 and by the sale of the Company's
investment in NDS in July 2012.
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For the three months For the nine months
ended ended
March 31, March 31,
---------------------------------- -----------------------------------
2013 2012 % Change 2013 2012 % Change
--------- -------- -------- ---------- -------- --------
(in millions, except %)
DBS equity affiliates $ 185 $ 229 (19)% $ 664 $ 484 37%
Cable channel equity
affiliates (13) (3) * * (31) (4) **
Other equity affiliates (15) (22) (32)% (112) (13) **
Total Equity earnings of
affiliates $ 157 $ 204 (23)% $ 521 $ 467 12%
** not meaningful
Interest expense, net- Interest expense, net increased $18
million and $36 million for the three and nine months ended March
31, 2013, respectively, as compared to the corresponding periods of
fiscal 2012, primarily due to the issuance of $1.0 billion of 3.00%
Senior Notes due 2022 in September 2012 and increased interest
expense related to the consolidation of Sky Deutschland debt.
Other, net-
For the three months For the nine months
ended ended
March 31, March 31,
---------------------------- -------------------------
2013 2012 2013 2012
-------------- -------- ------------- ------
(in millions)
Gain on Sky Deutschland transaction
(a) , (b) $ 2,069 $ - $ 2,069 $ -
Gain on sale of investment in SKY Network
Television Ltd. (a) 321 - 321 -
Gain on Phoenix Satellite Television
transaction (a) 81 - 81 -
Gain on CMH transaction (b) - - 1,245 -
Gain on sale of investment in NDS (a) - - 1,446 -
Gain on Fox Sports Asia transaction
(b) - - 174 -
Change in fair value of Sky Deutschland
convertible securities (a) - 7 58 (82)
Gain on FPAS transaction (b) - - - 158
Gain on Hathway Cable transaction (a) - 23 - 23
BSkyB termination fee (a) - - - (63)
Other (40) (3) (188) (14)
Total Other, net $ 2,431 $ 27 $ 5,206 $ 22
(a) See Note 6-Investments to the accompanying unaudited consolidated financial
statements.
(b) See Note 2-Acquisitions, Disposals and Other Transactions to the accompanying
unaudited consolidated financial statements.
Income tax expense- The effective income tax rates for the three
and nine months ended March 31, 2013 were 20% and 15%,
respectively, which were lower than the statutory rate of 35%,
primarily due to the net tax impact of the gain related to the
consolidation of Sky Deutschland and the non-taxable gain on the
sale of SKY Network Television Ltd. Also contributing to the
difference for the nine months ended March 31, 2013 was the
utilization of foreign tax credits in connection with the NDS sale,
the non-taxable gains related to the consolidation of FOX SPORTS
Australia and Fox Sports Asia and permanent differences.
The effective income tax rates for the three and nine months
ended March 31, 2012 were 22% and 24%, respectively, which were
lower than the statutory rate of 35%, primarily due to permanent
differences and the recognition of tax assets. In addition, for the
nine months ended March 31, 2012, the rate was also impacted by the
nontaxable gain related to the consolidation of FPAS and the
recognition of tax benefits from the disposition of certain
businesses.
Net income- Net income increased for the three and nine months
ended March 31, 2013 as compared to the corresponding periods of
fiscal 2012, primarily due to the gain on the Sky Deutschland
transaction. The increase in net income for the nine months ended
March 31, 2013 was also due to the gains on the sale of the
Company's investment in NDS and on the CMH transaction.
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Net income attributable to noncontrolling interests -Net income
attributable to noncontrolling interests decreased for the three
months ended March 31, 2013 as compared to the corresponding period
of fiscal 2012, primarily due to the noncontrolling interests'
share of Sky Deutschland's net losses. Net income attributable to
noncontrolling interests increased for the nine months ended March
31, 2013 as compared to the corresponding period of fiscal 2012,
primarily due to the issuances of additional noncontrolling
interests at the Company's cable businesses, partially offset by
the noncontrolling interests' share of Sky Deutschland's net
losses.
Segment Analysis
The following table sets forth the Company's revenues and
segment operating income (loss) for the three and nine months ended
March 31, 2013 as compared to the three and nine months ended March
31, 2012.
For the three months
ended For the nine months ended
March 31, March 31,
--------------------------------- ---------------------------------------
2013 2012 % Change 2013 2012 % Change
---------- ------ -------- ----------- ----------- --------
(in millions, except %)
Revenues:
Cable Network
Programming $ 2,782 $2,375 17% $ 7,790 $ 6,656 17%
Filmed
Entertainment 2,014 1,722 17% 5,826 5,563 5%
Television 1,225 1,208 1% 3,716 3,651 2%
Direct
Broadcast
Satellite
Television 1,300 923 41% 3,007 2,792 8%
Publishing 1,938 2,025 (4)% 6,105 6,224 (2)%
Other 279 149 87% 655 450 46%
Total Revenues $ 9,538 $8,402 14% $ 27,099 $ 25,336 7%
Segment operating income
(loss):
Cable Network
Programming $ 993 $ 846 17% $ 2,891 $ 2,503 16%
Filmed
Entertainment 289 272 6% 1,072 1,012 6%
Television 196 171 15% 576 493 17%
Direct
Broadcast
Satellite
Television (11) 40 ** (8) 165 **
Publishing 85 130 (35)% 376 458 (18)%
Other (190) (147) 29% (587) (437) 34%
Total Segment
operating income $ 1,362 $1,312 4% $ 4,320 $ 4,194 3%
** not meaningful
Management believes that total segment operating income is an
appropriate measure for evaluating the operating performance of the
Company's business segments because it is the primary measure used
by the Company's chief operating decision maker to evaluate the
performance and allocate resources within the Company's businesses.
Total segment operating income provides management, investors and
equity analysts a measure to analyze operating performance of each
of the Company's business segments and its enterprise value against
historical data and competitors' data, although historical results
may not be indicative of future results (as operating performance
is highly contingent on many factors, including customer tastes and
preferences). The following table reconciles total segment
operating income to income before income tax expense.
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For the three months For the nine months
ended ended
March 31, March 31,
-------------------------- -----------------------
2013 2012 2013 2012
------------ -------- ------------ --------
(in millions)
Total segment operating income $ 1,362 $ 1,312 $ 4,320 $ 4,194
Impairment and restructuring charges (56) (27) (273) (154)
Equity earnings of affiliates 157 204 521 467
Interest expense, net (276) (258) (809) (773)
Interest income 32 26 100 91
Other, net 2,431 27 5,206 22
Income from continuing operations before
income tax expense $ 3,650 $ 1,284 $ 9,065 $ 3,847
Cable Network Programming (29% and 26% of the Company's
consolidated revenues in the first nine months of fiscal 2013 and
2012, respectively)
For the three and nine months ended March 31, 2013, revenues at
the Cable Network Programming segment increased $407 million, or
17%, and $1,134 million, or 17%, respectively, as compared to the
corresponding periods of fiscal 2012, primarily due to higher net
affiliate and advertising revenues, partially offset by unfavorable
foreign exchange fluctuations at FIC and STAR. The strengthening of
the U.S. dollar against local currencies resulted in revenue
decreases of approximately $47 million and $142 million for the
three and nine months ended March 31, 2013, respectively, as
compared to the corresponding periods of fiscal 2012.
Domestic net affiliate revenues increased 11% and 14% for the
three and nine months ended March 31, 2013, respectively, as
compared to the corresponding periods of fiscal 2012, primarily due
to higher average rates per subscriber across most channels,
additional subscribers due to the acquisition of an RSN in Ohio and
the launch of Fox Sports San Diego. Domestic advertising revenue
increased 2% and 6%, respectively, for the three and nine months
ended March 31, 2013 as compared to the corresponding periods of
fiscal 2012 primarily due to higher pricing and ratings at FX and
the National Geographic Channels. The increases in advertising
revenues for the three months ended March 31, 2013 were partially
offset by decreased advertising revenues at Fox News due to lower
volume and pricing due to the absence of the 2012 presidential
primaries and lower advertising revenues at the RSNs due to fewer
NBA games broadcast. The increase in advertising revenues for the
nine months ended March 31, 2013 was due to higher pricing and
ratings at FX and the National Geographic Channels and higher NBA
and MLB advertising revenues at the RSNs. Advertising revenues lost
due to the NHL lockout were more than offset by additional NBA
broadcasts in the current period as the prior year period included
the negative impact of the NBA lockout.
International net affiliate revenues increased 42% and 37%,
respectively, for the three and nine months ended March 31, 2013,
as compared to the corresponding periods of fiscal 2012, primarily
due to the consolidation of Fox Sports Asia, the acquisition of EMM
and subscriber growth in Latin America. Also contributing to the
nine months ended March 31, 2013 was the consolidation of FPAS. For
the three and nine months ended March 31, 2013, international
advertising revenue increased 30% and 20%, respectively, as
compared to the corresponding periods of fiscal 2012, primarily due
to the consolidation of Fox Sports Asia and acquisition of EMM and
growth in Asia and Latin America. Also contributing to increase in
international advertising revenues for the nine months ended March
31, 2013 was the consolidation of FPAS. The higher advertising
revenues in Asia was due to new contracts to broadcast cricket
matches in India and the increase in Latin America was primarily
due to higher pricing.
For the three and nine months ended March 31, 2013, operating
income at the Cable Network Programming segment increased $147
million, or 17%, and $388 million, or 16%, respectively, as
compared to the corresponding periods of fiscal 2012, primarily due
to the revenue increases noted above, partially offset by expense
increases of $260 million and $746 million, respectively, due to
higher sports programming costs, the inclusion of expenses from Fox
Sports Asia and EMM and higher entertainment programming and
marketing costs at FX and the National Geographic Channels. Also
contributing to increase in expenses for the nine months ended
March 31, 2013 was the inclusion of expenses from the consolidation
of FPAS. The increases in sports programming costs for the three
and nine months ended March 31, 2013 were primarily due to the new
cricket contracts in India partially offset by fewer NBA games
broadcast. The decrease in NBA games was due to the expiration of
the programming rights agreements for two teams and the impact of
the NBA lockout during the prior year. The sports programming cost
increase for the nine months ended March 31, 2013 also reflects
mixed martial arts matches, U.S. college football games and higher
NBA costs due to the NBA lockout in the prior year period,
partially offset by reduced NHL costs resulting from the NHL
lockout in the current period. The
strengthening of the U.S. dollar against local currencies
resulted in operating profit decreases of approximately $25 million
and $66 million for the three and nine months ended March 31, 2013,
respectively, as compared to the corresponding periods of fiscal
2012.
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Filmed Entertainment(21% and 22% of the Company's consolidated
revenues in the first nine months of fiscal 2013 and 2012,
respectively)
For the three and nine months ended March 31, 2013, revenues at
the Filmed Entertainment segment increased $292 million, or 17%,
and $263 million, or 5%, respectively, as compared to the
corresponding periods of fiscal 2012, primarily due to higher
worldwide theatrical revenues. Also contributing to the revenue
increase for the nine months ended March 31, 2013 was higher
digital distribution revenues from the licensing of the Company's
television content. The increases in revenues for the nine months
ended March 31, 2013 were partially offset by decreased home
entertainment revenues, lower television production revenues due to
a decrease in the number of shows delivered internationally and
lower licensing revenues from Avatar. The three and nine months
ended March 31, 2013 included the worldwide theatrical and domestic
home entertainment success of Life of Pi as compared to the
corresponding fiscal 2012 periods which included the worldwide
theatrical and home entertainment success of Alvin and the
Chipmunks: Chipwrecked. The nine months ended March 31, 2013 also
included the worldwide theatrical and home entertainment success of
Ice Age: Continental Drift and Taken 2 as compared to the
corresponding fiscal 2012 period which included the worldwide
theatrical and home entertainment success of Rise of the Planet of
the Apes and the home entertainment success of Rio and X-Men: First
Class.
For the three and nine months ended March 31, 2013, the Filmed
Entertainment segment's operating income increased $17 million, or
6%, and $60 million, or 6%, respectively, primarily due to the
revenue increases noted above and lower television production
costs, partially offset by higher releasing costs, as well as
higher amortization of film production and participation costs.
Television (14% of the Company's consolidated revenues in the
first nine months of fiscal 2013 and 2012)
For the three and nine months ended March 31, 2013, revenues at
the Television segment increased $17 million and $65 million,
respectively, as compared to the corresponding periods of fiscal
2012, primarily due to higher retransmission consent revenues
partially offset by decreased advertising revenues resulting from
lower primetime ratings. The decrease in advertising revenues for
the nine months ended March 31, 2013 also reflected lower MLB
revenues due to the broadcast of three fewer World Series games in
the fall of 2012, the absence of the Emmy (R) Awards, which was
broadcast on FOX in fiscal 2012, and the broadcast of the 2012
Summer Olympics on a different network. The advertising revenue
decreases for the nine months ended March 31, 2013 were partially
offset by higher political advertising revenues at the Company's
television stations due to the 2012 U.S. election.
For the three and nine months ended March 31, 2013, operating
income at the Television Segment increased $25 million, or 15%, and
$83 million, or 17%, respectively, as compared to the corresponding
period of fiscal 2012, primarily due to the revenue increases noted
above and lower programming costs.
Direct Broadcast Satellite Television (11% of the Company's
consolidated revenues in the first nine months of fiscal 2013 and
2012)
For the three and nine months ended March 31, 2013, revenues at
the Direct Broadcast Satellite Television segment increased $377
million, or 41%, and $215 million, or 8%, respectively, as compared
to the corresponding periods of fiscal 2012, primarily due to the
inclusion of $410 million in revenues resulting from the
consolidation of Sky Deutschland, partially offset by lower
revenues at SKY Italia. During the three months ended March 31,
2013, the weakening of the U.S. dollar against the Euro resulted in
an increase in revenues of approximately $6 million. During the
nine months ended March 31, 2013, the strengthening of the U.S.
dollar against the Euro resulted in a decrease in revenues of
approximately $136 million.
During the third quarter of fiscal 2013, SKY Italia had a net
decrease of approximately 51,000 subscribers, which reduced SKY
Italia's total subscriber base to 4.8 million at March 31, 2013,
reflecting the continued challenging economic environment in Italy.
The total churn for the three months ended March 31, 2013 was
approximately 200,000 subscribers on an average subscriber base of
4.8 million, as compared to churn of approximately 200,000
subscribers on an average subscriber base of 5 million in the
corresponding period of fiscal 2012. During the third quarter of
fiscal 2013, Sky Deutschland had a net increase of approximately
42,000 subscribers, which increased Sky Deutschland's subscriber
base to 3.4 million at March 31, 2013. The total churn for the
three months ended March 31, 2013 was approximately 95,000 on an
average subscriber base of 3.4 million, as compared to churn of
approximately 82,000 subscribers on an average subscriber base of 3
million in the corresponding period of fiscal 2012. Subscriber
churn for the period represents the number of subscribers whose
service was disconnected during the period.
SKY Italia's average revenue per subscriber ("ARPU") of
approximately EUR42 in the three months ended March 31, 2013 was
consistent with the corresponding period of fiscal 2012. Sky
Deutschland's ARPU of approximately EUR33 in the three months ended
March 31, 2013 increased from approximately EUR32 in the
corresponding period of fiscal 2012. ARPU is calculated by dividing
total
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subscriber-related revenues, such as subscription and
pay-per-view revenues, for the period by the average subscribers
for the period and dividing that amount by the number of months in
the period. Average subscribers are calculated for the respective
periods by adding the beginning and ending subscribers for the
period and dividing by two.
SKY Italia's subscriber acquisition costs per subscriber ("SAC")
of approximately EUR280 in the third quarter of fiscal 2013
decreased from approximately EUR410 in the corresponding period of
fiscal 2012 primarily due to lower marketing costs on a per
subscriber basis. SAC is calculated by dividing total subscriber
acquisition costs for a period by the number of gross 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 to subscribers and the costs
related to installation and acquisition advertising net of any
upfront activation fee. SAC excludes the value of equipment
capitalized under equipment lease programs, as well as payments and
the value of returned equipment related to disconnected lease
program subscribers from subscriber acquisition costs.
For the three and nine months ended March 31, 2013, operating
results at the Direct Broadcast Satellite Television segment
decreased $51 million and $173 million, respectively, as compared
to the corresponding periods of fiscal 2012, primarily due to the
consolidation of Sky Deutschland's operating losses of
approximately $25 million and the decrease in SKY Italia's revenues
noted above. During the three and nine months ended March 31, 2013,
the change in foreign exchange rates between the U.S. dollar and
the Euro did not have a material impact on operating results.
Publishing (23% and 25% of the Company's consolidated revenues
in the first nine months of fiscal 2013 and 2012, respectively)
For the three and nine months ended March 31, 2013, revenues at
the Publishing segment decreased $87 million and $119 million,
respectively, as compared to the corresponding periods of fiscal
2012, primarily due to lower newspaper advertising revenues
principally reflecting the continued challenging economic
environment in Australia. Also contributing to the revenue decline
for the three months ended March 31, 2013 was lower advertising
revenues at the integrated marketing services business resulting
from lower rates from the in-store marketing products. The
decreases in revenues were partially offset by higher revenues at
the U.K. newspapers primarily due to the launch of the Sunday
edition of The Sun in February 2012 and higher third party printing
contract revenue and increased revenues at the book publishing
business resulting from the inclusion of revenues from the
acquisition of Thomas Nelson in July 2012. The strengthening of the
U.S. dollar against local currencies resulted in revenue decreases
of approximately $14 million and $5 million for the three and nine
months ended March 31, 2013, respectively, as compared to the
corresponding periods of fiscal 2012.
For the three and nine months ended March 31, 2013, operating
income at the Publishing segment decreased $45 million, or 35%, and
$82 million, or 18%, respectively, as compared to the corresponding
periods of fiscal 2012, primarily due to the revenue decreases
noted above, the inclusion of expenses from the acquisition of
Thomas Nelson, increased production and commission costs at the
integrated marketing services business and higher depreciation and
amortization expense. The decreases in operating income were
partially offset by cost saving initiatives.
Other (2% of the Company's consolidated revenues in the first
nine months of fiscal 2013 and 2012)
For the three and nine months ended March 31, 2013, revenues at
the Other segment increased $130 million, or 87%, and $205 million,
or 46%, respectively, as compared to the corresponding periods of
fiscal 2012, primarily due to the consolidation of FOX SPORTS
Australia and higher online advertising revenues at REA. Also
contributing to the increase for the nine months ended March 31,
2013 were higher revenues at Amplify, partially offset by the
absence of revenues from News Outdoor which was sold in fiscal
2012.
For the three and nine months ended March 31, 2013, operating
losses at the Other segment increased $43 million, or 29%, and $150
million, or 34%, respectively, as compared to the corresponding
periods of fiscal 2012, primarily due to the Separation costs and
higher product development costs at Amplify partially offset by the
revenue increases noted above. Also partially offsetting the
increase in operating losses for the three months ended March 31,
2013 was lower legal and professional fees related to The News of
the World investigations and litigation and costs for related civil
settlements as compared to the corresponding period of fiscal
2012.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
The Company's principal source of liquidity is internally
generated funds. The Company also has a five-year unused $2 billion
revolving credit facility, which expires in May 2017, and has
access to various film co-production alternatives to supplement its
cash
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flows. In addition, the Company has access to the worldwide
capital markets, subject to market conditions. As of March 31,
2013, the Company was in compliance with all of the covenants under
the revolving credit facility, and it does not anticipate any
violation of such covenants. The Company's internally generated
funds are highly dependent upon the state of the advertising
markets and public acceptance of its film and television
products.
The principal uses of cash that affect the Company's liquidity
position include the following: investments in the production and
distribution of new feature films and television programs; the
acquisition of and payments under programming rights for
entertainment and sports programming; paper purchases; operational
expenditures including employee costs; capital expenditures;
interest expenses; income tax payments; investments in associated
entities; dividends; acquisitions; debt repayments; and stock
repurchases. In connection with the capitalization of New News
Corporation, the Company is expected to make a cash contribution to
New News Corporation resulting in New News Corporation having
approximately $2.6 billion of cash on hand.
In addition to the acquisitions, sales and possible acquisitions
disclosed elsewhere, the Company has evaluated, and expects to
continue to evaluate, possible acquisitions and dispositions of
certain businesses. Such transactions may be material and may
involve cash, the Company's securities or the assumption of
additional indebtedness.
Sources and Uses of Cash
Net cash provided by operating activities for the nine months
ended March 31, 2013 and 2012 was as follows (in millions):
For the nine months ended March 31, 2013 2012
------------------------------------------ ------ ------
Net cash provided by operating activities $2,763 $2,721
The increase in net cash provided by operating activities during
the nine months ended March 31, 2013 as compared to the
corresponding period of fiscal 2012 primarily reflects higher
receipts at the Cable Network Programming segment due to higher
affiliate receipts and higher advertising receipts at the
Television segment. These increases were partially offset by lower
advertising receipts at the Publishing segment and higher
production spending at the Filmed Entertainment segment.
Net cash used in investing activities for the nine months ended
March 31, 2013 and 2012 was as follows (in millions):
For the nine months ended March 31, 2013 2012
-------------------------------------- ------- -----
Net cash used in investing activities $(1,384) $(987)
The increase in net cash used in investing activities during the
nine months ended March 31, 2013 as compared to the corresponding
period of fiscal 2012 was primarily due to additional cash utilized
for the Acquisitions and net equity investments.
Net cash used in financing activities for the nine months ended
March 31, 2013 and 2012 was as follows (in millions):
For the nine months ended March 31, 2013 2012
-------------------------------------- ------- -------
Net cash used in financing activities $(1,699) $(3,562)
The decrease in net cash used in financing activities during the
nine months ended March 31, 2013 as compared to the corresponding
period of fiscal 2012 was primarily due to lower share repurchases
in the current period and higher net borrowings.
The Company currently has approximately $3.6 billion remaining
of the $10.0 billion stock repurchase program. The Company may
repurchase shares within the remaining amount under the stock
repurchase program within the next twelve months and expects to
fund this through a combination of cash generated by operations and
cash on hand.
Debt Instruments
The following table summarizes borrowings and repayment of
borrowings for the nine months ended March 31, 2013 and 2012.
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For the nine months
ended March 31,
------------------------------
2013 2012
-------------- ----------
(in millions)
Borrowings:
Notes due September 2022 (a) 987 -
New revolving credit facility (b) 290 -
Total borrowings $ 1,277 $ -
Repayment of borrowings:
Notes due February 2013 (a) (273) (32)
All other (c) (716) -
Total repayment of borrowings $ (989) $ (32)
(a) See Note 9-Borrowings to the accompanying unaudited consolidated financial
statements for further discussion.
(b) In January 2013, Sky Deutschland, a majority owned subsidiary of the Company,
entered into a credit agreement, with major financial institutions, that
NAI and the Company have both guaranteed. The credit agreement provides a
EUR300 million unsecured credit facility with a sub-limit of EUR75 million
revolving credit facility available for cash drawdowns or the issuance of
letters of credit and a maturity date of January 2018. Sky Deutschland may
request that the maturity date be extended for one year. The significant
terms of the agreement include limitations on liens and indebtedness. Fees
under the credit agreement are based on the Company's long-term senior unsecured
non-credit enhanced debt ratings. Given the current debt ratings of the Company,
Sky Deutschland pays a facility fee of 0.125% and interest of Eurocurrency
Rate plus 1.125%. As of March 31, 2013, EUR225 million (approximately $290
million) was outstanding under this credit agreement and EUR75 million available
for either additional financing or letters of credit. The proceeds were used
to pay off existing Sky Deutschland debt.
(c) Debt acquired in the CMH and Sky Deutschland transactions. See Note 2-Acquisitions,
Disposals and Other Transactions to the accompanying unaudited consolidated
financial statements for further discussion.
Ratings of the Public Debt
The table below summarizes the Company's credit ratings as of
March 31, 2013.
Senior
Rating Agency Debt Outlook
------------- -------- -------
Moody's Baa1 Stable
S&P BBB+ Stable
Revolving Credit Agreement
In May 2012, NAI entered into a credit agreement (the "Credit
Agreement"), among NAI as Borrower, the Company as Parent
Guarantor, the lenders named therein, the initial issuing banks
named therein, JPMorgan Chase Bank, N.A. ("JPMorgan Chase") and
Citibank, N.A. as Co-Administrative Agents, JPMorgan Chase as
Designated Agent and Bank of America, N.A. as Syndication Agent.
The Credit Agreement provides a $2 billion unsecured revolving
credit facility with a sub-limit of $400 million (or its equivalent
in Euros) available for the issuance of letters of credit and a
maturity date of May 2017. Under the Credit Agreement, the Company
may request an increase in the amount of the credit facility up to
a maximum amount of $2.5 billion and the Company may request that
the maturity date be extended for up to two additional one-year
periods. Borrowings are issuable in U.S. dollars only, while
letters of credit are issuable in U.S. dollars or Euros. The
significant terms of the agreement include the requirement that the
Company maintain specific leverage ratios and limitations on
secured indebtedness. Fees under the Credit Agreement will be based
on the Company's long-term senior unsecured non-credit enhanced
debt ratings. Given the current debt ratings, NAI pays a facility
fee of 0.125% and an initial drawn cost of LIBOR plus 1.125%.
Commitments
The Company has commitments under certain firm contractual
arrangements ("firm commitments") to make future payments. These
firm commitments secure the future rights to various assets and
services to be used in the normal course of operations. The total
firm commitments and future debt payments as of March 31, 2013 and
June 30, 2012 were $82,946 million and $63,644 million,
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respectively. The increase from June 30, 2012 was primarily due
to the businesses acquired or consolidated during the nine months
ended March 31, 2013, the renewal of rights for MLB and NASCAR and
the issuance of 3.00% Senior Notes due 2022.
Guarantees
The Company also has certain contractual arrangements in
relation to certain investees that would require the Company to
make payments or provide funding if certain circumstances occur
("contingent guarantees"). The Company does not expect that these
contingent guarantees will result in any material amounts being
paid by the Company in the foreseeable future. The total contingent
guarantees decreased 6% as of March 31, 2013 as compared to June
30, 2012 due to the acquisition of 50% of Fox Sports Asia that the
Company did not own, partially offset by an additional guarantee
issued to Hulu as noted below.
In October 2012, Hulu redeemed Providence Equity Partners'
equity interest for $200 million. In connection with the
transaction, Hulu incurred a charge primarily related to employee
equity-based compensation. Accordingly, the Company recorded
approximately $60 million to reflect its share of the charge in the
second quarter of fiscal 2013. The Company has guaranteed $115
million of Hulu's $338 million five-year term loan which was used
by Hulu, in part, to finance the transaction. The fair value of
this guarantee was calculated using level 3 inputs and is included
in the consolidated balance sheet in other liabilities. As of March
31, 2013 the Company owns 34% of Hulu and continues to account for
its interest in Hulu as an equity method investment.
In April 2013, the Company sold its 10% investment in its joint
venture formed with CME Group Inc. ("CME"). As a result of the
transaction, the Company was released from its agreement to
indemnify CME with respect to any payment of principal, premium and
interest CME makes under its guarantee of the third-party debt
issued by the joint venture.
Contingencies
Other than as disclosed in the notes to the accompanying
unaudited consolidated financial statements, the Company is party
to several other purchase and sale arrangements which become
exercisable over the next ten years by the Company or the
counter-party to the agreement. None of these arrangements that
become or are exercisable in the next twelve months are material.
Purchase arrangements that are exercisable by the counter-party to
the agreement, and that are outside the sole control of the
Company, are accounted for in accordance with ASC 480-10-S99-3A,
"Distinguishing Liabilities from Equity." Accordingly, the fair
values of such purchase arrangements are classified in redeemable
noncontrolling interests.
As disclosed in the notes to the accompanying unaudited
consolidated financial statements, U.K. and U.S. regulators and
governmental authorities are conducting investigations relating to
the U.K. Newspaper Matters. The Company is cooperating with these
investigations.
The Company has admitted liability in many civil cases related
to the phone hacking allegations and has settled many cases. The
Company also announced a private compensation scheme under which
parties could pursue claims against the Company. While additional
civil lawsuits may be filed, no additional civil claims may be
brought under the compensation scheme after April 8, 2013.
The Company is not able to predict the ultimate outcome or cost
of the civil claims or criminal matters. At March 31, 2013, the
Company has provided for its best estimate of the liability for the
claims that have been filed. It is not possible to estimate the
liability for any additional claims that may be filed given the
information that is currently available to the Company. If more
claims are filed and additional information becomes available, the
Company will update the liability provision for such matters.
In connection with the proposed separation, the Company and New
News Corporation will agree in a separation and distribution
agreement that the Company will indemnify New News Corporation for
payments made after the distribution date arising out of civil
claims and investigations relating to the U.K. Newspaper Matters as
well as legal and professional fees and expenses paid in connection
with the criminal matters, other than fees, expenses and costs
relating to employees who are not (i) directors, officers or
certain designated employees or (ii) with respect to civil matters,
co-defendants with New News Corporation. In addition, violations of
law may result in criminal fines or penalties for which New News
Corporation will not be indemnified by the Company. It is possible
that these proceedings and any adverse resolution thereof,
including any fines or other penalties associated with any plea,
judgment or similar result could damage the Company's reputation,
impair its ability to conduct its business and adversely affect its
results of operations and financial condition.
The Company's operations are subject to tax in various domestic
and international jurisdictions and as a matter of course, the
Company is regularly audited by federal, state and foreign tax
authorities. The Company believes it has appropriately accrued for
the
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expected outcome of all pending tax matters and does not
currently anticipate that the ultimate resolution of pending tax
matters will have a material adverse effect on its consolidated
financial condition, future results of operations or liquidity.
Intangible Assets
The Company has a significant amount of intangible assets,
including goodwill, FCC licenses, and other copyright products and
trademarks. Intangible assets acquired in business combinations are
recorded at their estimated fair value at the date of acquisition.
Goodwill is recorded as the difference between the cost of
acquiring an entity and the estimated fair values assigned to its
tangible and identifiable intangible net assets and is assigned to
one or more reporting units for purposes of testing for impairment.
The judgments made in determining the estimated fair value assigned
to each class of intangible assets acquired, their reporting unit,
as well as their useful lives can significantly impact net
income.
The Company accounts for its business acquisitions under the
purchase method of accounting. The total cost of acquisitions is
allocated to the underlying net assets, based on their respective
estimated fair values. The excess of the purchase price over the
estimated fair values of the tangible net assets acquired is
recorded as intangibles. Amounts recorded as goodwill are assigned
to one or more reporting units. Determining the fair value of
assets acquired and liabilities assumed requires management's
judgment and often involves the use of significant estimates and
assumptions, including assumptions with respect to future cash
inflows and outflows, discount rates, asset lives and market
multiples, among other items. Identifying reporting units and
assigning goodwill to them requires judgment involving the
aggregation of business units with similar economic characteristics
and the identification of existing business units that benefit from
the acquired goodwill. The Company allocates goodwill to disposed
businesses using the relative fair value method.
Carrying values of goodwill and intangible assets with
indefinite lives are reviewed at least annually for possible
impairment in accordance with ASC 350, "Intangibles-Goodwill and
Other." The Company's impairment review is based on, among other
methods, a discounted cash flow approach that requires significant
management judgments. The Company uses its judgment in assessing
whether assets may have become impaired between annual valuations.
Indicators such as unexpected adverse economic factors,
unanticipated technological change or competitive activities, loss
of key personnel and acts by governments and courts, may signal
that an asset has become impaired.
The Company uses direct valuation methods to value identifiable
intangibles for purchase accounting and impairment testing. The
direct valuation method used for FCC licenses requires, among other
inputs, the use of published industry data that are based on
subjective judgments about future advertising revenues in the
markets where the Company owns television stations. This method
also involves the use of management's judgment in estimating an
appropriate discount rate reflecting the risk of a market
participant in the U.S. broadcast industry. The resulting fair
values for FCC licenses are sensitive to these long-term
assumptions and any variations to such assumptions could result in
an impairment to existing carrying values in future periods and
such impairment could be material.
The Company's goodwill impairment reviews are determined using a
two-step process. The first step of the process is to compare the
fair value of a reporting unit with its carrying amount, including
goodwill. In performing the first step, the Company determines the
fair value of a reporting unit by primarily using a discounted cash
flow analysis and market-based valuation approach methodologies.
Determining fair value requires the exercise of significant
judgments, including judgments about appropriate discount rates,
long-term growth rates, relevant comparable company earnings
multiples and the amount and timing of expected future cash flows.
The cash flows employed in the analyses are based on the Company's
estimated outlook and various growth rates have been assumed for
years beyond the long-term business plan period. Discount rate
assumptions are based on an assessment of the risk inherent in the
future cash flows of the respective reporting units. In assessing
the reasonableness of its determined fair values, the Company
evaluates its results against other value indicators, such as
comparable public company trading values. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the
reporting unit is not impaired and the second step of the
impairment review is not necessary. If the carrying amount of a
reporting unit exceeds its
fair value, the second step of the goodwill impairment review is
required to be performed to estimate the implied fair value of the
reporting unit's goodwill. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized
in a business combination. That is, the estimated fair value of the
reporting unit is allocated to all of the assets and liabilities of
that unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the
estimated fair value of the reporting unit was the purchase price
paid. The implied fair value of the reporting unit's goodwill is
compared with the carrying amount of that goodwill. If the carrying
amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an
amount equal to that excess.
As a result of the fiscal 2012 annual impairment review
performed, the Company recorded non-cash impairment charges of
approximately $2.8 billion ($2.4 billion, net of tax) during the
fiscal year ended June 30, 2012. The charges consisted of a
write-down of goodwill of $1.5 billion and a write-down of
indefinite-lived intangible assets of $1.3 billion. The Publishing
and Other segments have reporting units with goodwill and
intangible assets that continue to be at risk for future
impairment. As of June 30, 2012, $3.7
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billion of goodwill and intangible assets at these reporting
units is at risk for future impairment because the fair values of
the reporting units or indefinite-lived intangible assets exceeded
their carrying values by less than 10%. The Company will continue
to monitor its goodwill and intangible assets for possible future
impairment.
Recent Accounting Pronouncements
See Note 1-Basis of Presentation to the accompanying unaudited
consolidated financial statements for discussion of recent
accounting pronouncements.
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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
Company's 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 Company's U.S., U.K., European 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,
draw downs in the appropriate local currency are available from
intercompany borrowings. Since earnings of the Company's
Australian, U.K. and European 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 March 31, 2013, the Company's outstanding financial
instruments with foreign currency exchange rate risk consist of
foreign currency forward contracts with a notional amount of
approximately $1 billion and foreign denominated debt of $445
million. The aggregate fair value of the foreign denominated debt
and foreign currency forward contracts at March 31, 2013 was $453
million. The potential change in the fair values of these
instruments resulting from a 10% adverse change in quoted foreign
currency exchange rates would be approximately $145 million at
March 31, 2013.
Interest Rates
The Company's current financing arrangements and facilities
include approximately $16,474 million of outstanding fixed-rate
debt 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 March 31, 2013, substantially all of the Company's
financial instruments with exposure to interest rate risk were
denominated in U.S. dollars and had an aggregate fair value of
approximately $19,939 million. 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 $846
million at March 31, 2013.
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 Company's equity method
affiliates and had an aggregate fair value of approximately $8,853
million as of March 31, 2013. A hypothetical decrease in the market
price of these investments of 10% would result in a fair value of
approximately $7,968 million. Such a hypothetical decrease would
result in a before tax decrease in comprehensive income of
approximately $31 million, as any changes in fair value of the
Company's equity method affiliates are not recognized unless deemed
other-than-temporary.
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 Company's receivables did not represent significant
concentrations of credit risk at March 31, 2013 or June 30, 2012
due to the wide variety of customers, markets and geographic areas
to which the Company's 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
March 31, 2013, the Company did not anticipate nonperformance by
any of the counterparties.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The Company's management, with the participation of the
Company's Chairman and Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's
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 Company's Chairman and Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, the Company's 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 Company's
management, including the Company's 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 Company's 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 Company's third
quarter of fiscal 2013 that has materially affected, or is
reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Shareholder Litigation
Delaware
On March 16, 2011, a complaint seeking to compel the inspection
of the Company's books and records pursuant to 8 Del. C. -- 220,
captioned Central Laborers Pension Fund v. News Corporation, was
filed in the Delaware Court of Chancery. The plaintiff requested
the Company's books and records to investigate alleged possible
breaches of fiduciary duty by the directors of the Company in
connection with the Company's purchase of Shine (the "Shine
Transaction"). The Company moved to dismiss the action. On November
30, 2011, the court issued an order granting the Company's motion
and dismissing the complaint. The plaintiff filed a notice of
appeal on December 13, 2011. The Delaware Supreme Court heard
argument on the fully-briefed appeal on April 18, 2012 and issued a
decision on May 29, 2012 in which it affirmed the Court of
Chancery's dismissal of the complaint.
Also on March 16, 2011, two purported shareholders of the
Company, one of which was Central Laborers Pension Fund, filed a
derivative action in the Delaware Court of Chancery, captioned The
Amalgamated Bank v. Murdoch, et al. (the "Amalgamated Bank
Litigation"). The plaintiffs alleged that both the directors of the
Company and Rupert Murdoch as a "controlling shareholder" breached
their fiduciary duties in connection with the Shine Transaction.
The suit named as defendants all directors of the Company, and
named the Company as a nominal defendant. Similar claims against
the same group of defendants were filed in the Delaware Court of
Chancery by a purported shareholder of the Company, New Orleans
Employees' Retirement System, on March 25, 2011 (the "New Orleans
Employees' Retirement Litigation"). Both the Amalgamated Bank
Litigation and the New Orleans Employees' Retirement Litigation
were consolidated on April 6, 2011 (the "Consolidated Action"),
with The Amalgamated Bank's complaint serving as the operative
complaint. The Consolidated Action was captioned In re News Corp.
Shareholder Derivative Litigation. On April 9, 2011, the court
entered a scheduling order governing the filing of an amended
complaint and briefing on potential motions to dismiss.
Thereafter, the plaintiffs in the Consolidated Action filed a
Verified Consolidated Shareholder Derivative and Class Action
Complaint (the "Consolidated Complaint") on May 13, 2011, seeking
declaratory relief and damages. The Consolidated Complaint largely
restated the claims in The Amalgamated Bank's initial complaint and
also raised a direct claim on behalf of a purported class of
Company shareholders relating to the possible addition of Elisabeth
Murdoch to the Company's Board. The defendants filed opening briefs
in support of motions to dismiss the Consolidated Complaint on June
10, 2011, as contemplated by the court's scheduling order. On July
8, 2011, the plaintiffs filed a Verified Amended Consolidated
Shareholder Derivative and Class Action Complaint (the "Amended
Complaint"). In addition to the claims that were previously raised
in the Consolidated Complaint, the Amended Complaint brought claims
relating to the alleged acts of voicemail interception at The News
of the World (the "NoW Matter"). Specifically, the plaintiffs
claimed in the Amended Complaint that the directors of the Company
failed in their duty of oversight regarding the NoW Matter.
On July 15, 2011, another purported stockholder of the Company
filed a derivative action captioned Massachusetts Laborers' Pension
& Annuity Funds v. Murdoch, et al., in the Delaware Court of
Chancery (the "Mass. Laborers Litigation"). The complaint names as
defendants the directors of the Company and the Company as a
nominal defendant. The plaintiffs' claims are substantially similar
to those raised by the Amended Complaint in the Consolidated
Action. Specifically, the plaintiff alleged that the directors of
the Company have breached their fiduciary duties by, among other
things, approving the Shine Transaction and for failing to exercise
proper oversight in connection with the NoW Matter. The plaintiff
also brought a breach of fiduciary duty claim against Rupert
Murdoch as "controlling shareholder," and a waste claim against the
directors of the Company. The action seeks as relief damages,
injunctive relief, fees and costs. On July 25, 2011, the plaintiffs
in the Consolidated Action requested that the court consolidate the
Mass. Laborers Litigation into the Consolidated Action. On August
24, 2011, the Mass. Laborers Litigation was consolidated with the
Consolidated Action.
On September 29, 2011, the plaintiffs filed a Verified Second
Amended Consolidated Shareholder Derivative and Class Action
Complaint ("Second Amended Complaint"). In the Second Amended
Complaint, the plaintiffs removed their claims involving the
possible addition of Elisabeth Murdoch to the Company's Board,
added some factual allegations to support their remaining claims
and added a claim seeking to enjoin a buyback of Common B shares to
the extent it would result in a change of control. The Second
Amended Complaint seeks declaratory relief, an injunction
preventing the buyback of Class B shares, damages, pre- and
post-judgment interest, fees and costs.
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The defendants filed a motion to dismiss the Second Amended
Complaint. The hearing on the defendants' fully-briefed motion to
dismiss was postponed to allow further briefing by plaintiffs after
the Cohen Litigation, which is defined and described below, was
consolidated with the Consolidated Action.
On March 2, 2012, another purported stockholder of the Company
filed a derivative action captioned Belle M. Cohen v. Murdoch, et
al., in the Delaware Court of Chancery (the "Cohen Litigation").
The complaint names as defendants the directors of the Company and
the Company as a nominal defendant. The complaint's claims and
allegations pertain to the NoW Matter and are substantially similar
to the NoW Matter allegations raised in the Second Amended
Complaint in the Consolidated Action. The complaint asserts causes
of action against the defendants for alleged breach of fiduciary
duty, gross mismanagement, contribution and indemnification, abuse
of control, and waste of corporate assets. The action seeks as
relief damages, fees and costs. On March 20, 2012, the Cohen
Litigation was consolidated with the Consolidated Action.
On June 18, 2012, the plaintiffs in the Consolidated Action
filed a Verified Third Amended Consolidated Shareholder Derivative
Complaint (the "Third Amended Complaint"). The Third Amended
Complaint alleges claims against director defendants for breach of
fiduciary duty arising from the Shine Transaction; against Rupert
Murdoch for breach of fiduciary duty as the purported controlling
shareholder of the Company in connection with the Shine
Transaction; against director defendants for breach of fiduciary
duty arising from their purported failure to investigate illegal
conduct in the NoW Matter and allegedly permitting the Company to
engage in a cover up; against certain defendants for breach of
fiduciary duty in their capacity as officers arising from a
purported failure to investigate illegal conduct in the NoW Matter
and allegedly permitting the Company to engage in a cover up; and
against James Murdoch for breach of fiduciary duty for allegedly
engaging in a cover up related to the NoW Matter. The class action
claim asserted in the Second Amended Complaint pertaining to the
buyback of Common B shares and the relief related to that claim
were removed. The Third Amended Complaint seeks a declaration that
the defendants violated their fiduciary duties, damages, pre- and
post-judgment interest, fees and costs.
On July 18, 2012, the defendants renewed their postponed motion
to dismiss in the Consolidated Action, and in support thereof, they
filed supplemental briefing directed towards the allegations of the
Third Amended Complaint. Plaintiffs' response was filed on August
8, 2012. A hearing on the fully briefed motion was held in Chancery
Court on September 19, 2012. The Court reserved decision.
On April 17, 2013, the parties reached an agreement in principle
to settle the Consolidated Action. Pursuant to the terms of that
settlement, which is subject to the approval of the Delaware Court
of Chancery after notice to the stockholders and a hearing, the
parties agreed that the director defendants in the Consolidated
Action would cause to be paid on their behalf the amount of $139
million to the Company, minus any attorneys' fees and expenses
awarded by the Court to the plaintiffs' counsel. Such amount is to
be paid from an escrow account created for the benefit of the
director defendants pursuant to an agreement reached between the
defendants and their directors' and officers' liability insurers
for the payment of insurance proceeds, subject to a claims release.
In addition to the payment to the Company, the settlement
contemplates that the Company will build on corporate governance
and compliance enhancements which the Company has implemented in
the past year. These shall remain in effect at least through
December 31, 2016, and would be applicable to both 21st Century Fox
and New News Corporation. The Memorandum of Understanding related
to the settlement has been filed with the Court. On May 3, 2013,
the Stipulation of Settlement was filed with the Court. On May 6,
2013, the Court entered a Scheduling Order, which, among other
things, set the settlement hearing for June 26, 2013, and approved
the form of Notice of Pendency of Derivative Action, Proposed
Settlement of Derivative Action, Settlement Hearing, and Right to
Appear, which is being distributed to holders of the Company's
common stock in accordance with the Scheduling Order. In addition
to requiring the approval of the Delaware Court of Chancery, the
settlement will not become effective unless the Shields Litigation,
the Iron Workers Litigation and the Stricklin Litigation (each as
described below under the heading "Shareholder Litigation-Southern
District of New York") are also dismissed.
On May 30, 2012, a purported stockholder of the Company filed a
class action lawsuit in the Delaware Court of Chancery on behalf of
all non-U.S. stockholders of the Company's Class B shares,
captioned Första Ap-Fonden v. News Corporation, et al. The
plaintiff alleges that, by temporarily suspending 50% of the voting
rights of the Class B shares held by non-U.S. stockholders to
remain in compliance with U.S. governing broadcast licenses (the
"Suspension"), the Company and the Board violated the Company's
charter and the General Corporation Law of the State of Delaware
("DGCL") and the directors breached their fiduciary duties, both in
approving the Suspension and in failing to monitor the Company's
ownership by non-U.S. stockholders. The complaint named as
defendants the Company and all directors of the Company at the time
of the Suspension. The complaint sought a declaration that the
defendants violated the Company's charter and the DGCL, a
declaration that the directors breached their fiduciary duties, a
declaration that the Suspension is invalid and unenforceable, an
injunction of the Suspension, damages, fees, and costs. On June 11,
2012, the defendants filed an opening brief in support of a motion
to dismiss the complaint in its entirety. On August 2, 2012, the
plaintiff filed a Verified Amended and Supplemented Class Action
Complaint (the "Amended and Supplemented Complaint"). The Amended
and Supplemented Complaint seeks a declaration that the defendants
violated the Company's charter and the DGCL, a declaration that the
directors breached their fiduciary duties, a declaration that the
Suspension is invalid and unenforceable, an injunction of the
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Suspension, a declaration that non-U.S. stockholders of the
Company's Class B shares are entitled to vote all of their shares
on the Proposed Separation Transaction, damages, fees, and costs.
On August 28, 2012, the parties entered into a Memorandum of
Understanding providing for an agreement in principle to settle the
lawsuit. The Memorandum of Understanding, which was filed with the
Court on September 5, 2012, provides in pertinent part: (i) within
5 business days after receiving Court approval, the Company will
file a petition with the FCC requesting permission to comply with
law governing broadcast licenses for any meeting of stockholders by
(a) determining the number of shares held by foreign stockholders
that are present at the meeting and that would be entitled to vote
but for the Suspension, and (b) counting as votes cast all voted
shares held by foreign stockholders, up to a total of 25% of the
shares voted; (ii) the Company's Audit Committee will determine on
at least an annual basis the total number of voting shares held by
non-U.S. citizens and will have the power to modify or eliminate
any then-existing suspension; the Company will disclose this
information in its annual proxy materials and (iii) the Company
will not consent to amend, modify or terminate the Murdoch Family
Interests agreement without prior approval of the Audit Committee,
which in the case of any vote related to the Proposed Separation
Transaction, must be unanimous. The settlement is subject to Court
approval after notice to the stockholders and a hearing. The
Stipulation of Settlement was filed with the Court on November 30,
2012. On December 10, 2012, the Court entered a Scheduling Order,
which, among other things, set the settlement hearing for April 26,
2013, and approved the form of Notice of Pendency of Class Action,
Proposed Settlement of Class Action, Settlement Hearing, and Right
to Appear, which has been distributed to holders of the Company's
Class B Common Stock in accordance with the Scheduling Order. At a
hearing held on April 26, 2013, the Court approved the settlement
and dismissed the action with prejudice.
Southern District of New York
On July 18, 2011, a purported shareholder of the Company filed a
derivative action captioned Shields v. Murdoch, et al. ("Shields
Litigation"), in the United States District Court for the Southern
District of New York. The plaintiff alleged violations of Section
14(a) of the Securities Exchange Act, as well as state law claims
for breach of fiduciary duty, gross mismanagement, waste, abuse of
control and contribution/indemnification arising from, and in
connection with, the NoW Matter. The complaint names the directors
of the Company as defendants and names the Company as a nominal
defendant, and seeks damages and costs. On August 4, 2011, the
plaintiff filed an amended complaint. The plaintiff seeks
compensatory damages, an order declaring the October 15, 2010
shareholder vote on the election of the Company's directors void;
an order setting an emergency shareholder vote date for election of
new directors; an order requiring the Company to take certain
specified corporate governance actions; and an order (i) putting
forward a shareholder vote resolution for amendments to the
Company's Article of Incorporation and (ii) taking such other
action as may be necessary to place before shareholders for a vote
on corporate governance policies that: (a) appoint a non-executive
Chair of the Board who is not related to the Murdoch family or
extended family; (b) appoint an independent Chair of the Board's
Audit Committee; (c) appoint at least three independent directors
to the Governance and Nominating Committees; (d) strengthen the
Board's supervision of financial reporting processes and implement
procedures for greater shareholder input into the policies and
guidelines of the Board; and (e) appropriately test and strengthen
the internal and audit control functions.
On July 19, 2011, a purported class action lawsuit captioned
Wilder v. News Corp., et al. ("Wilder Litigation"), was filed on
behalf of all purchasers of the Company's common stock between
March 3, 2011 and July 11, 2011, in the United States District
Court for the Southern District of New York. The plaintiff brought
claims under Section 10(b) and Section 20(a) of the Securities
Exchange Act, alleging that false and misleading statements were
issued regarding the NoW Matter. The suit names as defendants the
Company, Rupert Murdoch, James Murdoch and Rebekah Brooks, and
seeks compensatory damages, rescission for damages sustained, and
costs.
On July 22, 2011, a purported shareholder of the Company filed a
derivative action captioned Stricklin v. Murdoch, et al.
("Stricklin Litigation"), in the United States District Court for
the Southern District of New York. The plaintiff brought claims for
breach of fiduciary duty, gross mismanagement, and waste of
corporate assets in connection with, among other things, (i) the
NoW Matter; (ii) News America's purported payments to settle
allegations of anti-competitive behavior; and (iii) the Shine
Transaction. The action names as defendants the Company, Les
Hinton, Rebekah Brooks, Paul Carlucci and the directors of the
Company. On August 3, 2011, the plaintiff served a motion for
expedited discovery and to appoint a conservator over the Company,
which defendants objected to. The motion has not been formally
calendared and there is no briefing schedule yet. On August 16,
2011, the plaintiffs filed an amended complaint. The plaintiff
seeks various forms of relief including compensatory damages,
injunctive relief, disgorgement, the award of voting rights to
Class A shareholders, the appointment of a conservator over the
Company to oversee the Company's responses to investigations and
litigation related to the NoW Matter, fees and costs.
On August 10, 2011, a purported shareholder of the Company filed
a derivative action captioned Iron Workers Mid-South Pension Fund
v. Murdoch, et al. ("Iron Workers Litigation"), in the United
States District Court for the Southern District of New York. The
plaintiff brought claims for breach of fiduciary duty, waste of
corporate assets, unjust enrichment and alleged violations of
Section 14(a) of the Securities Exchange Act in connection with the
NoW Matter. The action names as defendants the Company, Les Hinton,
Rebekah Brooks and the directors of the Company. The plaintiff
seeks various forms of relief including compensatory damages,
voiding the election of the director defendants, an order requiring
the Company to take certain specified corporate governance actions,
injunctive relief, restitution, fees and costs.
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The Wilder Litigation, the Stricklin Litigation and the Iron
Workers Litigation are all now before the judge in the Shields
Litigation. On November 21, 2011, the court issued an order setting
a briefing schedule for the defendants' motion to stay the
Stricklin Litigation, the Iron Workers Litigation and the Shields
Litigation pending the outcome of the consolidated action pending
in the Delaware Court of Chancery. On September 18, 2012, the Court
denied the motion as to two of the cases and dismissed the third
with leave to replead, which plaintiff has done. Specifically, on
October 4, 2012, Stricklin filed a Second Amended Complaint that
added a claim under Section 14(a) of the Securities Exchange Act
challenging the disclosures in the Company's definitive proxy
statements issued during the years of 2005 through 2012. The
plaintiff seeks, among other things, to void the election of the
director defendants at the Company's 2012 annual meeting. The
plaintiffs in Shields, Stricklin and Iron Workers have requested a
pre-motion conference to address the potential consolidation of
these derivative actions and a briefing schedule regarding the
potential leadership structure for the plaintiffs. The pre-motion
conference has not yet been scheduled. In the Wilder Litigation, on
June 5, 2012, the court issued an order appointing the Avon Pension
Fund ("Avon") as lead plaintiff and Robbins Geller Rudman &
Dowd as lead counsel. Thereafter, on July 3, 2012, the court issued
an order providing that an amended consolidated complaint shall be
filed by July 31, 2012. Avon filed an amended consolidated
complaint on July 31, 2012, which among other things, added as
defendants NI Group Limited and Les Hinton, and expanded the
class
period to include February 15, 2011 to July 18, 2011. Defendants
filed their motion to dismiss on September 25, 2012, plaintiffs'
opposition was filed November 6, 2012 and defendants' reply was
filed November 30, 2012. The motion is pending.
The Company's management believes these shareholder claims are
entirely without merit, and intends to vigorously defend these
actions. The settlement of the Consolidated Action (described above
under the heading "Shareholder Litigation-Delaware") will not
become effective unless the Shields Litigation, the Iron Workers
Litigation and the Stricklin Litigation are also dismissed.
The News of the World Investigations and Litigation
U.K. and U.S. regulators and governmental authorities continue
to conduct investigations initiated in 2011 with respect to the
U.K. Newspaper Matters. The Company is cooperating with these
investigations.
The Company has admitted liability in many civil cases related
to the phone hacking allegations and has settled many cases. The
Company also announced a private compensation scheme under which
parties could pursue claims against the Company. While additional
civil lawsuits may be filed, no additional civil claims may be
brought under the compensation scheme after April 8, 2013.
The Company is not able to predict the ultimate outcome or cost
of the civil claims or criminal matters. The Company has incurred
legal and professional fees related to the U.K. Newspaper Matters
and costs for civil settlements totaling approximately $42 million
and $63 million during the three months ended March 31, 2013 and
2012, respectively, and $165 million and $167 million during the
nine months ended March 31, 2013 and 2012, respectively. These
costs are included in Selling, general and administrative expenses
in the Company's unaudited consolidated statements of operations.
As of March 31, 2013, the Company has provided for its best
estimate of the liability for the claims that have been filed and
costs incurred and has accrued approximately $60 million. It is not
possible to estimate the liability for any additional claims that
may be filed given the information that is currently available to
the Company. If more claims are filed and additional information
becomes available, the Company will update the liability provision
for such matters.
In connection with the proposed separation, the Company and New
News Corporation will agree in a separation and distribution
agreement that the Company will indemnify New News Corporation for
payments made after the distribution date arising out of civil
claims and investigations relating to the U.K. Newspaper Matters as
well as legal and professional fees and expenses paid in connection
with the criminal matters, other than fees, expenses and costs
relating to employees who are not (i) directors, officers or
certain designated employees or (ii) with respect to civil matters,
co-defendants with New News Corporation. In addition, violations of
law may result in criminal fines or penalties for which New News
Corporation will not be indemnified by the Company. It is possible
that these proceedings and any adverse resolution thereof,
including any fines or other penalties associated with any plea,
judgment or similar result could damage the Company's reputation,
impair its ability to conduct its business and adversely affect its
results of operations and financial condition.
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HarperCollins
Commencing on August 9, 2011, twenty-nine purported consumer
class actions have been filed in the U.S. District Courts for the
Southern District of New York and for the Northern District of
California, which relate to the decisions by certain publishers,
including HarperCollins Publishers L.L.C. ("HarperCollins"), to
begin selling their eBooks pursuant to an agency relationship. The
cases all involve allegations that certain named defendants in the
book publishing and distribution industry, including HarperCollins,
violated the antitrust and unfair competition laws by virtue of the
switch to the agency model for eBooks. The actions seek as relief
treble damages, injunctive relief and attorneys' fees. The Judicial
Panel on Multidistrict Litigation has transferred the various class
actions to the Honorable Denise L. Cote in the Southern District of
New York. On January 20, 2012, plaintiffs filed a consolidated
amended complaint, again alleging that certain named defendants,
including HarperCollins, violated the antitrust and unfair
competition laws by virtue of the switch to the agency model for
eBooks. Defendants filed a motion to dismiss on March 2, 2012. On
May 15, 2012, Judge Cote denied defendants' motion to dismiss. On
June 22, 2012, Judge Cote held a status conference to address
discovery and scheduling issues. On June 25, 2012, Judge Cote
issued a scheduling order for the multi-district litigation going
forward. Additional information about In re MDL Electronic Books
Antitrust Litigation, Civil Action No. 11-md-02293 (DLC), can be
found on Public Access to Court Electronic Records (PACER). While
it is not possible to predict with any degree of certainty the
ultimate outcome of these class actions, HarperCollins believes it
was compliant with applicable antitrust and competition laws.
Following an investigation, on April 11, 2012, the Department of
Justice (the "DOJ") filed an action in the U.S. District Court for
the Southern District of New York against certain publishers,
including HarperCollins, and Apple, Inc. The DOJ's complaint
alleges antitrust violations relating to defendants' decisions to
begin selling eBooks pursuant to an agency relationship. This case
was assigned to Judge Cote. Simultaneously, the DOJ announced that
it had reached a proposed settlement with three publishers,
including HarperCollins, and filed a Proposed Final Judgment and
related materials detailing that agreement. Among other things, the
Proposed Final Judgment requires that HarperCollins terminate its
agreements with certain eBook retailers and places certain
restrictions on any agreements subsequently entered into with such
retailers. Pursuant to the Antitrust Procedures and Penalties Act,
the Proposed Final Judgment could not be entered by Judge Cote for
at least sixty days while the DOJ received public comments. The
public comment period ended on June 25, 2012. Pursuant to Judge
Cote's June 25, 2012 scheduling order, the DOJ's motion for entry
of the Proposed Final Judgment was fully briefed by August 22,
2012, and on September 5, 2012, Judge Cote granted the DOJ's motion
and entered the Final Judgment. A third party has filed a motion to
intervene in the case for the purpose of appealing Judge Cote's
decision entering the Final Judgment to the United States Court of
Appeals for the Second Circuit. On March 26, 2013, the United
States Court of Appeals for the Second Circuit dismissed his
appeal. Additional information about the Final Judgment can be
found on the DOJ's website.
Following an investigation, on April 11, 2012, 16 state
Attorneys General led by Texas and Connecticut (the "AGs") filed a
similar action against certain publishers and Apple, Inc. in the
Western District of Texas. On April 26, 2012, the AGs' action was
transferred to Judge Cote. On May 17, 2012, 33 AGs filed a second
amended complaint. As a result of a memorandum of understanding
agreed upon with the AGs for Texas and Connecticut, HarperCollins
was not named as a defendant in this action. Pursuant to the terms
of the memorandum of understanding, HarperCollins entered into a
settlement agreement with the AGs for Texas, Connecticut and Ohio
on June 11, 2012. By August 28, 2012, forty-nine states (all but
Minnesota) and five U.S. territories had signed on to that
settlement agreement. On August 29, 2012, the AGs simultaneously
filed a complaint against HarperCollins and two other publishers, a
motion for preliminary approval of that settlement agreement and a
proposed distribution plan. On September 14, 2012, Judge Cote
granted the AGs' motion for preliminary approval of the settlement
agreement and approved the AGs' proposed distribution plan. Notice
was subsequently sent to potential class members, and a fairness
hearing was held on February 8, 2013, where Judge Cote granted
final approval of the settlement. The settlement now is effective
and the final judgment will bar consumers from states and
territories covered by the settlement from participating in the
class action.
On October 12, 2012, HarperCollins received a Civil
Investigative Demand from the Attorney General from the State of
Minnesota. HarperCollins complied with the Demand on November 16,
2012 and is cooperating with that investigation. While it is not
possible to predict with any degree of certainty the ultimate
outcome of the inquiry, HarperCollins believes it was compliant
with applicable antitrust laws.
The European Commission conducted an investigation into whether
certain companies in the book publishing and distribution industry,
including HarperCollins, violated the antitrust laws by virtue of
the switch to the agency model for eBooks. Following discussions
with the European Commission, the Office of Fair Trading closed its
investigation in favor of the European Commission's investigation
on December 6, 2011. HarperCollins settled the matter with the
European Commission on terms substantially similar to the
settlement with the DOJ. On December 13, 2012, the European
Commission formally adopted the settlement.
Commencing on February 24, 2012, five purported consumer class
actions were filed in the Canadian provinces of British Columbia,
Quebec and Ontario, which relate to the decisions by certain
publishers, including HarperCollins, to begin selling their eBooks
in Canada pursuant to an agency relationship. The actions seek as
relief special, general and punitive damages, injunctive relief and
the costs of the litigations. While it is not possible to predict
with any degree of certainty the ultimate outcome of these class
actions, especially given their early stages, HarperCollins
believes it was compliant with applicable antitrust and competition
laws and intends to defend itself vigorously.
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In July 2012, HarperCollins Canada, a wholly-owned subsidiary of
HarperCollins, learned that the Canadian Competition Bureau ("CCB")
had commenced an inquiry regarding the sale of eBooks in Canada.
HarperCollins currently is cooperating with the CCB with respect to
its inquiry. While it is not possible to predict with any degree of
certainty the ultimate outcome of the inquiry, HarperCollins
believes it was compliant with applicable antitrust and competition
laws.
Other
The Company's operations are subject to tax in various domestic
and international jurisdictions and as a matter of course, the
Company is regularly audited by federal, state and foreign tax
authorities. The Company believes it has appropriately accrued for
the expected outcome of all pending tax matters and does not
currently anticipate that the ultimate resolution of pending tax
matters will have a material adverse effect on its consolidated
financial condition, future results of operations or liquidity.
The Company establishes an accrued liability for legal claims
when the Company determines that a loss is both probable and the
amount of the loss can be reasonably estimated. Once established,
accruals are adjusted from time to time, as appropriate, in light
of additional information. The amount of any loss ultimately
incurred in relation to matters for which an accrual has been
established may be higher or lower than the amounts accrued for
such matters. Legal fees associated with litigation and similar
proceedings that are not expected to provide a benefit in future
periods are expensed as incurred. Any fees, expenses, fines,
penalties, judgments or settlements which might be incurred by the
Company in connection with the various proceedings could affect the
Company's results of operations and financial condition. For the
contingencies disclosed above for which there is at least a
reasonable possibility that a loss may be incurred, other than the
accrual provided, the Company was unable to estimate the amount of
loss or range of loss.
ITEM 1A. RISK FACTORS
Prospective investors should consider carefully the risk factors
set forth below before making an investment in the Company's
securities.
A Decline in Advertising Expenditures Could Cause the Company's
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 direct broadcast satellite 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 Company's products is also a factor in
determining advertising rates. For example, ratings points for the
Company's television stations, broadcast and cable networks and
circulation levels for the Company's newspapers are factors that
are weighed when determining advertising rates, and with respect to
the Company's 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, digital distribution
models for books 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 and advertisements. 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
Company's offerings to viewers, advertisers and/or distributors. A
decrease in advertising expenditures or reduced demand for the
Company's offerings can lead to a reduction in pricing and
advertising spending, which could have an adverse effect on the
Company's businesses and assets.
Global Economic Conditions May Have a Continuing Adverse Effect
on the Company's 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 Company's business, results of operations, financial condition
and liquidity. A continued decline in these economic conditions
could further impact the Company's business, reduce the
Company's
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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 Company's
results of operations may be adversely affected. Although the
Company believes that its operating cash flow and current access to
capital and credit markets, including the Company's 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 Company's liquidity or increase
its cost of borrowing.
Acceptance of the Company's 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 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 and mastheads, 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. Any significant shortfall, now or in
the future, in advertising revenue and/or the expected popularity
of the 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 Publishing, 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 Company's reported net earnings.
Fluctuations in Foreign Exchange Rates Could Have an Adverse
Effect on the Company's 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 fluctuates
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 Company's
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
Company's ability to sell national advertising time. Similarly, the
Company's broadcast stations and 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 Company's broadcast stations
and 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
Company's 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
Company's advertising and affiliate revenues. Upon renewal, the
Company's 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.
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The Company Relies on Network and Information Systems and Other
Technology That May Be Subject to Disruption or Misuse, Which Could
Result in Improper Disclosure of Personal Data or Confidential
Information as well as Increased Costs or Loss of Revenue.
Network and information systems and other technologies,
including those related to our network management, are important to
our business activities. Network and information systems-related
events, such as computer hackings, computer viruses, worms or other
destructive or disruptive software, process breakdowns, denial of
service attacks, malicious social engineering or other malicious
activities, or any combination of the foregoing, could result in a
disruption of our services or improper disclosure of personal data
or confidential information. Improper disclosure of such
information could harm our reputation, require us to expend
resources to remedy such a security breach or subject us to
liability under laws that protect personal data, resulting in
increased costs or loss of revenue.
Technological Developments May Increase the Threat of Content
Piracy and Signal Theft and Limit the Company's Ability to Protect
Its Intellectual Property Rights.
The Company seeks to limit the threat of content piracy and
direct broadcast satellite programming signal theft; however,
policing unauthorized use of the Company's 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 direct broadcast
satellite programming signals and the proliferation of
user-generated content sites and live and stored video streaming
sites, which deliver unauthorized copies of copyrighted content,
including those emanating from other countries in various
languages, may adversely impact the Company's businesses. 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. However, protection
of the Company's intellectual property rights is dependent on the
scope and duration of the Company's rights as defined by applicable
laws in the United States and abroad and the manner in which those
laws are construed. If those laws are drafted or interpreted in
ways that limit the extent or duration of the Company's rights, or
if existing laws are changed, the Company's ability to generate
revenue from intellectual property may decrease, or the cost of
obtaining and maintaining rights may increase. There can be no
assurance that the Company's efforts to enforce its rights and
protect its products, services and intellectual property will be
successful in preventing content piracy or signal theft. Content
piracy and signal theft present a threat to the Company's revenues
from products and services, including, but not limited to, films,
television shows, cable and other programming and books.
The Company Must Respond to Changes in Consumer Behavior as a
Result of New Technologies in Order to Remain Competitive.
Technology, particularly digital technology used in the
entertainment industry, continues to evolve rapidly, leading to
alternative methods for the delivery and storage of digital
content. These technological advancements have driven changes in
consumer behavior and have empowered consumers to seek more control
over when, where and how they consume digital content. Content
owners are increasingly delivering their content directly to
consumers over the Internet, often without charge, and innovations
in distribution platforms have enabled consumers to view such
Internet-delivered content on televisions and portable devices.
There is a risk that the Company's responses to these changes and
strategies to remain competitive, including distribution of its
content on a "pay" basis, may not be adopted by consumers. In
addition, enhanced Internet capabilities and other new media may
reduce television viewership, the demand for DVDs and Blu-rays, the
desire to see motion pictures in theaters and the demand for
newspapers, which could negatively affect the Company's revenues.
In publishing, the trending toward digital media may drive down the
price consumers are willing to spend on our products
disproportionately to the costs associated with generating literary
content. The Company's failure to protect and exploit the value of
its content, while responding to and developing new technology and
business models to take advantage of advancements in technology and
the latest consumer preferences, could have a significant adverse
effect on the Company's businesses, asset values and results of
operations.
Labor Disputes May Have an Adverse Effect on the Company's
Business.
In a variety of the Company's 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
Company's 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 Company's business by causing
delays in production or by reducing profit margins.
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Changes in U.S. or Foreign Regulations May Have an Adverse
Effect on the Company's 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 licensees. Our program services and online
properties are subject to a variety of laws and regulations,
including those relating to issues such as content regulation, user
privacy and data protection, and consumer protection, among others.
Further, the United States Congress, the FCC and state legislatures
currently have under consideration, and may in the future adopt,
new laws, regulations and policies regarding a wide variety of
matters, including technological changes and measures relating to
privacy and data security, which could, directly or indirectly,
affect the operations and ownership of the Company's 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 laws, regulations or the
interpretations thereof in the U.S. and other jurisdictions in
which the Company has operations could affect the Company's results
of operations.
U.S. Citizenship Requirements May Limit Common Stock Ownership
and Voting Rights.
The Company owns broadcast station licensees in connection with
its ownership and operation of U.S. television stations. Under U.S.
law, no broadcast station licensee may be owned by a corporation if
more than 25% of its stock is owned or voted by non-U.S. persons,
their representatives, or by any other corporation organized under
the laws of a foreign country. The Company's Restated Certificate
of Incorporation authorizes the Board of Directors to prevent, cure
or mitigate the effect of stock ownership above the applicable
foreign ownership threshold by taking any action including:
refusing to permit any transfer of common stock to or ownership of
common stock by a non-U.S. stockholder; voiding a transfer of
common stock to a non-U.S. stockholder; suspending rights of stock
ownership if held by a non-U.S. stockholder; or redeeming common
stock held by a non-U.S. stockholder. In order to maintain
compliance with U.S. law, as of April 2013, the suspension of
voting rights of the Class B Common Stock held by non-U.S.
stockholders was 40%. This suspension will remain in place for as
long as the Company deems it necessary to maintain compliance with
applicable U.S. law, and may be adjusted by the Audit Committee as
it deems appropriate. The Company is not able to predict whether it
will need to adjust the suspension or whether additional action
pursuant to its Restated Certificate of Incorporation may be
necessary. The FCC could review the Company's compliance with
applicable U.S. law in connection with its consideration of the
Company's renewal applications for licenses to operate the
broadcast stations the Company owns.
We Face Investigations Regarding Allegations of Phone Hacking,
Illegal Data Access, Inappropriate Payments to Public Officials and
Other Related Matters and Related Civil Lawsuits.
U.K. and U.S. regulators and governmental authorities are
conducting investigations relating to the "U.K. Newspaper Matters".
The Company is cooperating with these investigations.
The Company has admitted liability in many civil cases related
to the phone hacking allegations and has settled many cases. The
Company also announced a private compensation scheme under which
parties could pursue claims against the Company. While additional
civil lawsuits may be filed, no additional civil claims may be
brought under the compensation scheme after April 8, 2013.
The Company is not able to predict the ultimate outcome or cost
of the civil claims or criminal matters. In connection with the
proposed separation, the Company and New News Corporation will
agree in a separation and distribution agreement that the Company
will indemnify New News Corporation for payments made after the
distribution date arising out of civil claims and investigations
relating to the U.K. Newspaper Matters as well as legal and
professional fees and expenses paid in connection with the criminal
matters, other than fees, expenses and costs relating to employees
who are not (i) directors, officers or certain designated employees
or (ii) with respect to civil matters, co-defendants with New News
Corporation. In addition, violations of law may result in criminal
fines or penalties for which New News Corporation will not be
indemnified by the Company. It is possible that these proceedings
and any adverse resolution thereof, including any fines or other
penalties associated with any plea, judgment or similar result
could damage the Company's reputation, impair its ability to
conduct its business and adversely affect its results of operations
and financial condition.
The Proposed Separation of the Company's Publishing and Media
and Entertainment Businesses into Two Distinct Publicly Traded
Companies May Not Be Completed on the Terms or Timeline Currently
Contemplated, If At All.
In June 2012, the Company announced its intention to pursue the
separation of its publishing and its media and entertainment
businesses into two distinct publicly traded companies (the
"Proposed Separation Transaction"). Unanticipated developments
could delay or negatively impact the Proposed Separation
Transaction, including those related to obtaining various
regulatory approvals, opinions from tax counsel and favorable
rulings from certain tax jurisdictions regarding the tax-free
nature of the transaction to the Company and its stockholders,
completing further due diligence as appropriate, the filing and
effectiveness of appropriate filings with the SEC, the execution of
certain agreements relating to the distribution, and changes in
market conditions, among other things. In
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addition, consummation of the Proposed Separation Transaction
will require final approval from the Company's Board of Directors
and stockholder approval of certain amendments to the Company's
Restated Certificate of Incorporation. Therefore, we cannot assure
that we will be able to complete the Proposed Separation
Transaction on the terms or on the timeline that we announced, if
at all.
We are actively engaged in planning for the Proposed Separation
Transaction. We expect to incur expenses in connection with the
Proposed Separation Transaction and any delays in the anticipated
completion of the Proposed Separation Transaction may increase
these expenses. In addition, completion of the Proposed Separation
Transaction will require significant amounts of our management's
time and effort which may divert management's attention from our
businesses. The Proposed Separation Transaction may result in the
division of key employees into the two separate public companies
which may create a knowledge and skill gap.
Further, shares of our common stock will represent an investment
in two smaller separate public companies. These changes may not
meet some stockholders' investment strategies, which could cause
investors to sell their shares of our common stock in either
company. Excessive selling could cause the relative market price of
common stock in either or both companies to decrease following
completion of the Proposed Separation Transaction.
Risk factors of 21st Century Fox in connection with the
Separation
If the Distribution, Together with Certain Related Transactions,
Were Ultimately Determined to be Taxable Transactions for U.S.
Federal Income Tax Purposes, then 21st Century Fox Could Be Subject
to Significant Tax Liability.
The distribution is conditioned upon a private letter ruling
from the IRS substantially to the effect that, among other things,
the distribution of Class A Common Stock and Class B Common Stock
of New News Corporation qualifies as tax-free under Sections 368
and 355 of the Internal Revenue Code of 1986, as amended (the
"Code") except for cash received in lieu of fractional shares of
New News Corporation stock, as well as upon the Company receiving
an opinion from the law firm of Hogan Lovells US LLP confirming the
tax-free status of the distribution for U.S. federal income tax
purposes, including confirming the satisfaction of the requirements
under Section 368 and 355 of the Code not specifically addressed in
the IRS private letter ruling. The opinion of Hogan Lovells US LLP
will not be binding on the IRS or the courts, and there is no
assurance that the IRS or a court will not take a contrary
position.
The private letter ruling and the opinion will rely on certain
facts and assumptions, and certain representations from us and New
News Corporation regarding the past and future conduct of our
respective businesses and other matters. Notwithstanding the
receipt of the private letter ruling and the opinion, the IRS could
determine on audit that the distribution or the internal
transactions should be treated as taxable transactions if it
determines that any of these facts, assumptions, representations or
undertakings is not correct or has been violated, or that the
distribution or the internal transactions should be taxable for
other reasons, including as a result of a significant change in
stock or asset ownership after the distribution. If the
distribution ultimately is determined to be taxable, the
distribution could be treated as a taxable dividend or capital gain
for U.S. federal income tax purposes, and U.S. stockholders and
certain non-U.S. stockholders could incur significant U.S. federal
income tax liabilities. In addition, if the internal reorganization
and/or the distribution is ultimately determined to be taxable,
21st Century Fox would recognize gains on the internal
reorganization and/or recognize gain in an amount equal to the
excess of the fair market value of shares of the New News
Corporation common stock distributed to our stockholders on the
distribution date over our tax basis in such shares of our common
stock.
21st Century Fox Could Be Liable for Income Taxes Owed by New
News Corporation.
Each member of our consolidated group, which includes New News
Corporation and each of our other subsidiaries, is jointly and
severally liable for the U.S. federal income tax liability of each
other member of the consolidated group. Consequently, 21st Century
Fox or New News Corporation could be liable in the event any such
liability is incurred, and not discharged, by any other member of
our consolidated group. Under the terms of the tax sharing and
indemnification agreement that we intend to enter into in
connection with the distribution 21st Century Fox will be required
to indemnify New News Corporation for any such liability. Disputes
or assessments could arise during future audits by the IRS in
amounts that we cannot quantify.
21st Century Fox Might Not Be Able to Engage in Desirable
Strategic Transactions and Equity Issuances Following the
Distribution Because of Certain Restrictions Relating to
Requirements for Tax-Free Distributions for U.S. Federal Income Tax
Purposes.
21st Century Fox's ability to engage in significant strategic
transactions and equity issuances may be limited or restricted
after the distribution in order to preserve, for U.S. federal
income tax purposes, the tax-free nature of the distribution. Even
if the distribution
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otherwise qualifies for tax-free treatment under Section 355 of
the Code, it may result in corporate level taxable gain to us under
Section 355(e) of the Code if 50% or more, by vote or value, of
shares of our stock or New News Corporation's stock are acquired or
issued as part of a plan or series of related transactions that
includes the distribution.
To preserve the tax-free treatment of the distribution and the
internal transactions in connection with the distribution for U.S.
federal income tax purposes, under the tax sharing and
indemnification agreement that we will enter into with New News
Corporation, 21st Century Fox will be prohibited from taking or
failing to take certain actions that may prevent the distribution
and related transactions from being tax-free for U.S. federal
income tax purposes. Further, for the two-year period following the
distribution, 21st Century Fox may be prohibited from:
-- approving or allowing any transaction that results in a change in ownership
of more than a specified percentage of our common stock,
-- a merger,
-- a redemption of equity securities exceeding 20% of its outstanding capital
stock,
-- a sale or other disposition of certain businesses or a specified percentage
of our assets, or
-- an acquisition of a business or assets with equity securities to the extent
one or more persons would acquire in excess of a specified percentage
of our common stock
These restrictions may limit 21st Century Fox's ability to
pursue strategic transactions or engage in new business or other
transactions that may maximize the value of our business.
The Separation and Distribution Agreement May Restrict 21st
Century Fox From Acquiring or Owning Certain Types of Assets in the
U.S.
The FCC has promulgated certain rules and regulations that limit
the ownership of radio and television broadcast stations,
television broadcast networks and newspapers (the "Broadcast
Ownership Rules"). Under the FCC's rules for determining ownership
of the media assets described above, the Murdoch Family Trust's
ownership interest in both New News Corporation and 21st Century
Fox following the distribution would generally result in each
company's businesses and assets being attributable to the Murdoch
Family Trust for purposes of determining compliance with the
Broadcast Ownership Rules. Consequently, 21st Century Fox's future
conduct, including the acquisition of any broadcast networks or
stations, or any newspapers, in the same local markets in which New
News Corporation owns or operates newspapers or has acquired
television stations may affect New News Corporation's ability to
own and operate its newspapers or any television stations it
acquires or otherwise comply with the Broadcast Ownership Rules.
Therefore, we and New News Corporation will agree in the separation
and distribution agreement that if 21st Century Fox acquires, after
the separation, newspapers, radio or television broadcast stations
or television broadcast networks in the U.S. and such acquisition
would impede or be reasonably likely to impede New News
Corporation's business, then 21st Century Fox will be required to
take certain actions, including divesting assets, in order to
permit New News Corporation to hold its media interests and to
comply with such rules. This agreement will effectively limit the
activities or strategic business alternatives available to 21st
Century Fox if such activities or strategic business alternatives
implicate the Broadcast Ownership Rules and would impede or be
reasonably likely to impede New News Corporation's business.
The Indemnification Arrangements We Enter Into With New News
Corporation in Connection With the Distribution May Require 21st
Century Fox to Divert Cash to Satisfy Indemnification Obligations
to New News Corporation.
Pursuant to the separation and distribution agreement and
certain other related agreements, 21st Century Fox will agree to
indemnify New News Corporation for certain liabilities and New News
Corporation will agree to indemnify 21st Century Fox for certain
liabilities. As a result, 21st Century Fox could be required, under
certain circumstances, to indemnify New News Corporation against
certain liabilities to the extent such liabilities result from an
action we or our affiliates take or from any breach of our or our
affiliates' representations, covenants or obligations under the
separation and distribution agreement, tax sharing and
indemnification agreement or any other agreement we enter into in
connection with the distribution.
After the Distribution, Certain of 21st Century Fox's Directors
and Officers May Have Actual or Potential Conflicts of Interest
Because of Their Equity Ownership in New News Corporation, and
Certain of New News Corporation's Officers and Directors May Have
Actual or Potential Conflicts of Interest Because They Also Serve
as Officers and/or on the Board of Directors of 21st Century
Fox.
77
Table of Contents
Following the distribution, certain of 21st Century Fox's
directors and executive officers may own shares of New News
Corporation's common stock, and the individual holdings may be
significant for some of these individuals compared to their total
assets. In addition, following the distribution, certain of 21st
Century Fox's officers and directors will also serve as officers
and/or as directors of New News Corporation, including K. Rupert
Murdoch, who will serve as New News Corporation Executive Chairman
and the Chairman and Chief Executive Officer of 21st Century Fox,
and Gerson Zweifach, who will serve as New News Corporation's
General Counsel and as Senior Executive Vice President and Group
General Counsel of 21st Century Fox. This ownership or service to
both companies may create, or may create the appearance of,
conflicts of interest when these directors and officers are faced
with decisions that could have different implications for 21st
Century Fox and New News Corporation.
For example, potential conflicts of interest could arise in
connection with the resolution of any dispute that may arise
between New News Corporation and 21st Century Fox regarding the
terms of the agreements governing the internal reorganization, the
distribution and the relationship thereafter between the companies,
including with respect to the indemnification of certain matters.
In addition to any other arrangements that 21st Century Fox and New
News Corporation may agree to implement, 21st Century Fox and New
News Corporation will agree that officers and directors who serve
at both companies will recuse themselves from decisions where
conflicts arise due to their positions at both companies.
78
Table of Contents
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Board had previously authorized a total stock repurchase
program of $6 billion with a remaining authorized amount under the
program of approximately $1.8 billion, excluding commissions, as of
June 30, 2011. In July 2011, the Company announced that the Board
had authorized increasing the total amount of the stock repurchase
program remaining by approximately $3.2 billion to $5 billion. In
May 2012, the Company announced that the Board approved a $5
billion increase to the Company's stock repurchase program for the
repurchase of Class A Common Stock.
The remaining authorized amount under the Company's stock
repurchase program at March 31, 2013, excluding commissions, was
approximately $3.6 billion.
The program may be extended, modified, suspended or discontinued
at any time.
Below is a summary of the Company's purchases of its Class A
Common Stock during the three months ended March 31, 2013:
Average
Total Number Price Total
of Shares per Cost
Purchased Share of Purchase
------------- --------- --------------
(in millions)
January 6,100,000 $ 26.07 $ 159
February 5,500,000 28.00 154
March 2,900,000 30.00 87
Total 14,500,000 $ 400
The Company did not purchase any of its Class B Common Stock
during the three months ended March 31, 2013.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
79
Table of Contents
ITEM 6. EXHIBITS
(a) Exhibits.
10.1 Amendment No. 2 to the News Corporation 2005 Long-Term Incentive Plan.*
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 Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2013 formatted in eXtensible
Business Reporting Language: (i) Unaudited Consolidated Statements of
Operations for the three and nine months ended March 31, 2013 and 2012;
(ii) Unaudited Consolidated Statements of Comprehensive Income for the
three and nine months ended March 31, 2013 and 2012; (iii) Consolidated
Balance Sheets at March 31, 2013 (unaudited) and June 30, 2012 (audited);
(iv) Unaudited Consolidated Statements of Cash Flows for the nine months
ended March 31, 2013 and 2012; and (v) Notes to the Unaudited Consolidated
Financial Statements.*
* Filed herewith.
** Furnished herewith.
80
Table of Contents
SIGNATURE
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: May 10, 2013
81
Exhibit 10.1
AMENDMENT NO. 2
TO THE
NEWS CORPORATION 2005 LONG-TERM INCENTIVE PLAN
This Amendment No. 2 to the News Corporation 2005 Long-Term
Incentive Plan, as amended (this "Amendment") is made as of
February 12, 2013. Capitalized terms used in this Amendment and not
otherwise defined herein shall have the meanings assigned to them
in the News Corporation 2005 Long-Term Incentive Plan, as amended
(the "Plan").
WHEREAS, on February 12, 2013, the Board of Directors of News
Corporation approved the following amendment to the Plan.
NOW, THEREFORE,
1. Article V, Section 5.2 of the Plan is hereby amended to read in its entirety
as follows:
Section 5.2 Performance Goals.
Unless otherwise determined by the Committee, the grant, vesting
and/or exercisability of Performance Awards shall be conditioned,
in whole or in part, on the attainment of performance targets, in
whole or in part, related to one or more performance goals over a
Performance Period. For any such Performance Awards that are
intended to qualify for the Section 162(m) Exception, the
performance targets on which the grant, vesting and/or
exercisability are conditioned shall be selected by the Committee
from among the following goals, on a GAAP or non-GAAP basis (the
"Section 162(m) Performance Goals"): Net income, adjusted net
income, EBITDA, adjusted EBITDA, OIBDA, adjusted OIBDA, operating
income, adjusted operating income, free cash flow, net earnings,
net earnings from continuing operations, earnings per share,
adjusted earnings per share, revenue, net revenue, operating
revenue, total stockholder return, share price, return on equity,
return in excess of cost of capital, profit in excess of cost of
capital, return on assets, return on invested capital, net
operating profit after tax, operating margin, profit margin or any
combination thereof. A Section 162(m) Performance Goal may be
stated as a combination of one or more goals (e.g., free cash flow
return on invested capital), and on an absolute or relative
basis.
In addition, for any Awards not intended to qualify for the
Section 162(m) Exception, the Committee may establish performance
targets based on other performance goals as it deems appropriate
(together with the Section 162(m) Performance Goals, the
"Performance Goals"). The Performance Goals may be described in
terms of objectives that are related to the individual Participant
or objectives that are Company-wide or related to an Affiliate,
division, department, region, function or business unit, including,
without limitation, financial and operating performance and
individual contributions to financial and non-financial objectives,
and the implementation and enforcement of effective compliance
programs, and may be measured on an absolute or cumulative basis or
on the basis of percentage of improvement over time, and may be
measured in terms of Company performance (or performance of the
applicable Affiliate, division, department, region, function or
business unit) or measured relative to selected peer companies or a
market index.
2. This amendment shall remain in full force and effect for the term of the
Plan.
Exhibit 12.1
News Corporation
Computation of Ratio of Earnings to Fixed Charges
(in Millions, Except Ratio Amounts)
(Unaudited)
For the nine months ended
March 31,
---------------------------------
2013 2012
-------------- -------------
Earnings:
Income before income tax expense $ 9,065 $ 3,847
Add:
Equity earnings from affiliates (521) (467)
Dividends received from affiliates 311 313
Fixed charges, excluding capitalized interest 966 932
Amortization of capitalized interest 35 36
Total earnings available for fixed charges $ 9,856 $ 4,661
Fixed charges:
Interest on debt and finance lease charges $ 809 $ 773
Capitalized interest 29 33
Interest element on rental expense 157 159
Total fixed charges $ 995 $ 965
Ratio of earnings to fixed charges 9.9 4.8
Exhibit 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
I, K. Rupert Murdoch, Chairman and Chief Executive Officer of
News Corporation ("News Corporation" or the "Company"), certify
that:
1. I have reviewed this quarterly report on Form 10-Q of News Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this quarterly report based
on such evaluation; and
(d) Disclosed in this quarterly report any change in the Company's
internal control over financial reporting that occurred during
the Company's third quarter of fiscal 2013 that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting; and
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the Company's independent registered public accounting firm and the
Audit Committee of the Company's Board of Directors:
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Company's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
control over financial reporting.
May 10, 2013
By: /s/ K. Rupert Murdoch
----------------------------
K. Rupert Murdoch
Chairman and Chief Executive
Officer
Exhibit 31.2
Chief Financial Officer Certification
Required by Rules 13a-14 and 15d-14 under the Securities
Exchange Act of 1934, as amended
I, David F. DeVoe, Senior Executive Vice President and Chief
Financial Officer of News Corporation ("News Corporation" or the
"Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of News Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this quarterly report based
on such evaluation; and
(d) Disclosed in this quarterly report any change in the Company's
internal control over financial reporting that occurred during
the Company's third quarter of fiscal 2013 that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting; and
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the Company's independent registered public accounting firm and the
Audit Committee of the Company's Board of Directors:
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Company's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
control over financial reporting.
May 10, 2013
By: /s/ David F. DeVoe
-------------------------------
David F. DeVoe
Senior Executive Vice President
and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of News Corporation on
Form 10-Q for the fiscal quarter ended March 31, 2013, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), we, the undersigned officers of News Corporation,
certify, pursuant to 18 U.S.C. --1350, as adopted pursuant to --906
of the Sarbanes-Oxley Act of 2002, that, to the best of our
knowledge:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of News Corporation.
May 10, 2013
By: /s/ K. Rupert Murdoch
-------------------------------
K. Rupert Murdoch
Chairman and Chief Executive
Officer
By: /s/ David F. DeVoe
-------------------------------
David F. DeVoe
Senior Executive Vice President
and
Chief Financial Officer
This information is provided by RNS
The company news service from the London Stock Exchange
END
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