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NEWS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) This document 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 months ended September 30, 2012 and
2011. 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 three months ended September 30, 2012 and
2011. 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 broadband
directly to subscribers in Italy.
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• 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 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.
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.
Retransmission consent rules provide a mechanism for the television stations
owned by the Company to seek and obtain payment from multi-channel video
programming distributors who carry broadcasters' signals. Retransmission consent
revenue consists of per subscriber-based compensatory fees paid to the Company
from cable and satellite distribution systems for FOX and MyNetworkTV as well as
a portion of the retransmission consent revenue the affiliates generate for
their retransmission of FOX.
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 2022, 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 at September 30, 2012 of attributable revenues and
costs; such estimates may change in the future and such changes may be
significant. Should revenues decline from estimates applied at September 30,
2012, 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.
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
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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 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, which provides basic and premium programming services via
satellite directly to subscribers in Italy. SKY Italia 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. SKY Italia'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.
SKY Italia'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 Italy 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, the price of paper and
salaries and employee benefits are the key variables whose fluctuations can have
a material effect on the Company's operating results and cash flow. The Company
has to anticipate the level of advertising volume, circulation and paper prices
in managing its businesses to maximize operating profit during expanding and
contracting economic cycles. The Company continues to be exposed to risks
associated with paper used for printing. Paper is a basic commodity and its
price is sensitive to the balance of supply and demand. The Company's expenses
are affected by the cyclical increases and decreases in the price of paper. The
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
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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 as digital advertising rates are lower due to
the additional supply of available advertisements, especially impacting
classified advertising. 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:
Digital Media Group
The Company sells advertising, sponsorships and subscription services on the
Company's various digital media properties. 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 education technology businesses, is dedicated to
improving K-12 education by creating digital products and services that empower
teachers, students and parents in new ways. Amplify is focused on transforming
teaching and learning by creating and scaling digital innovations in three
areas: analytics and assessment, content and curriculum and distribution and
delivery. Amplify focuses on educational analytics and formative assessment
through Wireless Generation, Inc. ("Wireless Generation"). Significant expenses
associated with the Company's education technology businesses 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
termination benefits and certain organizational restructuring at the U.K.
newspapers. The Company is subject to several ongoing investigations by U.K. and
U.S. regulators and governmental authorities, including investigations into
whether similar conduct may have occurred at the Company's subsidiaries outside
of the U.K. The Company is cooperating with these investigations. In addition,
the Company has admitted liability in a number of civil cases related to the
phone hacking allegations and has settled a number of 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 News of the World matters and all other related issues across News
International. 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 News
International and engaged independent outside counsel to advise it on these
investigations and all other matters it handles. News International has
instituted governance reforms and issued certain enhanced policies to its
employees. The Company has also engaged independent outside counsel to assist it
in responding to U.S. governmental inquiries.
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In February 2012, the Company agreed to backstop €300 million (approximately
$395 million) of financing measures that are being initiated by Sky Deutschland
AG ("Sky Deutschland"), of which €145 million (approximately $195 million)
remains as of September 30, 2012.
In June 2012, the Company announced that it intends to pursue the separation of
its publishing and its media and entertainment businesses into two distinct
publicly traded companies. The global publishing company that would be created
through the proposed transaction would consist of the Company's publishing
businesses, its education division and other Australian assets. The global media
and entertainment company would consist of the Company's cable and television
assets, filmed entertainment, and direct satellite broadcasting businesses.
Following the separation, each company would maintain two classes of common
stock: Class A Common and Class B Common Voting Shares. The separation is
expected to be completed in approximately one year from the date of
announcement. In addition to final approval from the Board and stockholder
approval, the completion of the separation will be subject to receipt of
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 to its stockholders, further due diligence as appropriate, and
the filing and effectiveness of appropriate filings with the SEC.
In July 2012, the Company acquired Thomas Nelson, Inc. ("Thomas Nelson"), one of
the leading Christian book publishers in the United States, 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 August 2012, the Company entered into an agreement to acquire a 51% equity
interest in Eredivisie Media & Marketing CV ("EMM"). EMM is a media company
based in the Netherlands which holds the Dutch Premier League soccer rights and
operates several channels in the Netherlands. EMM is owned by the 18 Dutch
Premier League soccer clubs and the global TV production company Endemol. The
acquisition is subject to regulatory clearances and other customary closing
conditions.
In September 2012, the Company agreed to acquire Consolidated Media Holdings
Ltd. ("CMH"), a media investment company that operates in Australia, for
approximately $2 billion. CMH has a 25% interest in FOXTEL and a 50% interest in
FOX Sports Australia, a producer of Australia's leading sports channels. The
acquisition will double the Company's stakes in FOX Sports Australia and FOXTEL
to 100% and 50%, respectively. The transaction was approved by CMH shareholders
in October 2012 and by the Federal Court of Australia in November 2012, and is
expected to close on November 19, 2012.
In November 2012, the Company acquired the remaining 50% interest in ESPN STAR
Sports ("ESS") it did not already own for approximately $335 million in
cash. ESS is the leading sports broadcaster in Asia and the Company now, through
its wholly owned subsidiaries, owns 100% of ESS. Accordingly, the results of ESS
will be included in the Company's consolidated results of operations in November
2012.
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RESULTS OF OPERATIONS
Results of Operations-For the three months ended September 30, 2012 versus the
three months ended September 30, 2011
The following table sets forth the Company's operating results for the three
months ended September 30, 2012 as compared to the three months ended
September 30, 2011.
For the three months ended
September 30,
2012 2011 % Change
(in millions, except %)
Revenues $ 8,136 $ 7,959 2 %
Operating expenses (4,848 ) (4,753 ) 2 %
Selling, general and administrative (1,610 ) (1,527 ) 5 %
Depreciation and amortization (300 ) (294 ) 2 %
Impairment and restructuring charges (152 ) (91 ) 67 %
Equity earnings of affiliates 190 121 57 %
Interest expense, net (267 ) (258 ) 3 %
Interest income 31 36 (14 )%
Other, net 1,375 (130 ) * *
Income before income tax expense 2,555 1,063 * *
Income tax expense (259 ) (277 ) (6 )%
Net income 2,296 786 * *
Less: Net income attributable to noncontrolling
interests (63 ) (48 ) 31 %
Net income attributable to News Corporation
stockholders $ 2,233 $ 738 * *
** not meaningful
Overview-The Company's revenues increased 2% for the three months ended
September 30, 2012 as compared to the corresponding period of fiscal
2012, primarily due to higher net affiliate and advertising revenues at the
Cable Network Programming segment, partially offset by decreased revenues at the
DBS segment resulting from unfavorable foreign exchange fluctuations.
Operating expenses increased 2% for the three months ended September 30, 2012 as
compared to the corresponding period of fiscal 2012, primarily due to higher
sports programming costs at the Cable Network Programming, Television and DBS
segments, and the inclusion of operating expenses resulting from the
consolidation of Fox Pan American Sports LLC ("FPAS") and the acquisition of
Thomas Nelson. These increases were partially offset by decreased operating
expenses at the Filmed Entertainment segment resulting from lower production
amortization costs.
Selling, general and administrative expenses increased 5% for the three months
ended September 30, 2012 as compared to the corresponding period of fiscal 2012,
primarily due to $67 million of legal and professional fees related to The News
of the World investigations and litigation and costs for related civil
settlements and the inclusion of expenses resulting from the consolidation of
FPAS.
Depreciation and amortization increased 2% for the three months ended
September 30, 2012 as compared to the corresponding period of fiscal 2012,
primarily due to additional amortization from the consolidation of FPAS at the
Cable Networking Programming segment. These increases were partially offset by
favorable foreign exchange fluctuations.
Impairment and restructuring charges-At the end of fiscal 2012, the Company
identified certain businesses as held for sale. During the three months ended
September 30, 2012, the Company recorded a $35 million non-cash impairment
charge 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 months ended September 30, 2012, the Company recorded
restructuring charges of $117 million, of which $112 million related to the
newspaper businesses. The restructuring charges primarily relate to the
reorganization of the Australian
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newspaper businesses which was announced at the end of fiscal 2012 and the
continued reorganization of the U.K. newspaper business. The restructuring
charges recorded in the first quarter of fiscal 2013 are primarily for
termination benefits in Australia and contract termination payments in the U.K.
During the three months ended September 30, 2011, the Company recorded
approximately $91 million of restructuring charges, of which $88 million related
to the newspaper businesses. The Company commenced the reorganization of
portions of the newspaper business and recorded a restructuring charge primarily
for termination benefits as a result of the shutdown of The News of the
World and certain organizational restructurings at other newspapers.
Equity earnings of affiliates-Equity earnings of affiliates increased $69
million for the three months ended September 30, 2012 as compared to the
corresponding period of fiscal 2012, primarily due to a $75 million gain on the
sale of a portion of the Company's British Sky Broadcasting Group plc investment
in accordance with its share repurchase program and improved results from Sky
Deutschland, partially offset by the sale of the Company's investment in NDS in
July 2012.
For the three months
ended September 30,
2012 2011 % Change
(in millions, except %)
DBS equity affiliates $ 213 $ 123 73 %
Cable channel equity affiliates 4 - * *
Other equity affiliates (27 ) (2 ) * *
Total Equity earnings of affiliates $ 190 $ 121 57 %
** not meaningful
Interest expense, net-Interest expense, net increased $9 million for the three
months ended September 30, 2012 as compared to the corresponding period of
fiscal 2012, primarily due to higher public debt due to the issuance of $1.0
billion of 3.00% Senior Notes due 2022.
Other, net-
For the three months ended
September 30,
2012 2011
(in millions)
Gain on sale of investment in NDS(a) $ 1,446 $ -
Change in fair value of Sky Deutschland convertible
securities(a) 7 (82 )
BSkyB termination fee(a) - (63 )
Other (78 ) 15
Total Other, net $ 1,375 $ (130 )
(a) See Note 6-Investments to the accompanying unaudited consolidated financial
statements.
Income tax expense-The Company's effective income tax rate for the three months
ended September 30, 2012 was lower than the statutory rate of 35%, primarily due
to the utilization of foreign tax credits in connection with the NDS sale and
permanent differences.
The effective income tax rate for the three months ended September 30, 2011 was
26% which was lower than the statutory rate of 35%, primarily due to the sale of
interests in subsidiaries and permanent differences.
Net income-Net income increased for the three months ended September 30, 2012 as
compared to the corresponding period of fiscal 2012, primarily due to the gain
on the sale of the Company's investment in NDS.
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Net income attributable to noncontrolling interests-Net income attributable to
noncontrolling interests increased for the three months ended September 30, 2012
as compared to the corresponding period of fiscal 2012, primarily due to the
issuances of additional noncontrolling interests at the Company's cable
businesses.
Segment Analysis
The following table sets forth the Company's revenues and segment operating
income (loss) for the three months ended September 30, 2012 as compared to the
three months ended September 30, 2011.
For the three months ended
September 30,
2012 2011 % Change
(in millions, except %)
Revenues:
Cable Network Programming $ 2,449 $ 2,120 16 %
Filmed Entertainment 1,745 1,778 (2 )%
Television 959 923 4 %
Direct Broadcast Satellite Television 817 922 (11 )%
Publishing 2,018 2,069 (2 )%
Other 148 147 1 %
Total revenues $ 8,136 $ 7,959 2 %
Segment operating income (loss):
Cable Network Programming $ 953 $ 775 23 %
Filmed Entertainment 400 347 15 %
Television 156 133 17 %
Direct Broadcast Satellite Television 23 119 (81 )%
Publishing 57 110 (48 )%
Other (211 ) (99 ) * *
Total segment operating income $ 1,378 $ 1,385 (1 )%
** 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.
For the three months
ended September 30,
2012 2011
(in millions)
Total segment operating income $ 1,378 $ 1,385
Impairment and restructuring charges (152 ) (91 )
Equity earnings of affiliates 190 121
Interest expense, net (267 ) (258 )
Interest income 31 36
Other, net 1,375 (130 )
Income before income tax expense $ 2,555 $ 1,063
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Cable Network Programming (30% and 27% of the Company's consolidated revenues in
the first three months of fiscal 2013 and 2012, respectively)
For the three months ended September 30, 2012, revenues at the Cable Network
Programming segment increased $329 million, or 16%, as compared to the
corresponding period of fiscal 2012, primarily due to higher net affiliate and
advertising revenues, partially offset by unfavorable foreign exchange
fluctuations, primarily at FIC and STAR. The strengthening of the U.S dollar
against the local currencies resulted in a revenue decrease of approximately $67
million for the three months ended September 30, 2012, as compared to the
corresponding period of fiscal 2012.
Domestic net affiliate revenues increased 16% for the three months ended
September 30, 2012, primarily due to higher average rates per subscriber at the
RSNs, FOX News and FX. For the three months ended September 30, 2012, domestic
advertising revenues increased 8% primarily due to higher pricing at FOX News
and FX and higher MLB advertising revenues. Also contributing to the increase in
domestic affiliate and advertising revenues was the launch of Fox Sports San
Diego.
For the three months ended September 30, 2012, international net affiliate
revenues increased 25%, primarily due to higher subscribers at FIC and the
consolidation of FPAS partially offset by foreign exchange fluctuations.
International advertising revenues improved on a local currency basis, but
decreased 1% for the three months ended September 30, 2012. The decrease in
international advertising revenues was primarily due to foreign exchange
fluctuations and was partially offset by higher advertising revenues in Latin
America due to the consolidation of FPAS.
For the three months ended September 30, 2012, operating income at the Cable
Network Programming segment increased $178 million, or 23%, as compared to the
corresponding period of fiscal 2012, primarily due to the revenue increases
noted above, partially offset by a $151 million increase in expenses, primarily
due to higher sports programming costs and the consolidation of FPAS.
Contributing to the sports programming increase were new contracts to broadcast
cricket matches at Star India, mixed martial arts matches and additional U.S
college football games. Also contributing to the increase was the launch of Fox
Sports San Diego and other MLB contractual rights increases. The strengthening
of the U.S. dollar against local currencies resulted in an operating income
decrease of approximately $30 million for the three months ended September 30,
2012, as compared to the corresponding period of fiscal 2012.
Filmed Entertainment (21% and 22% of the Company's consolidated revenues in the
first three months of fiscal 2013 and 2012, respectively)
For the three months ended September 30, 2012, revenues at the Filmed
Entertainment segment decreased $33 million, or 2%, as compared to the
corresponding period of fiscal 2012, primarily due to lower home entertainment
revenues at Fox Filmed Entertainment and lower licensing revenues from Avatar.
The three months ended September 30, 2011, included the home entertainment
releases of Rio and X-Men: First Class with no comparable titles in the
corresponding period of fiscal 2013. These revenue decreases were partially
offset by increased worldwide theatrical revenues resulting from the success of
Ice Age: Continental Drift in the three months ended September 30, 2012,
compared to the corresponding fiscal 2012 period which included the worldwide
theatrical release of Rise of the Planet of the Apes. These revenue decreases
were also partially offset by increased digital distribution revenue related to
the timing of content availability to Netflix.
For the three months ended September 30, 2012, operating income at the Filmed
Entertainment segment increased $53 million, or 15%, as compared to the
corresponding period of fiscal 2012, primarily due to lower production
amortization costs partially offset by the revenue decreases noted above.
Television (12% of the Company's consolidated revenues in the first three months
of fiscal 2013 and 2012)
For the three months ended September 30, 2012, revenues at the Television
segment increased $36 million, or 4%, as compared to the corresponding period of
fiscal 2012, primarily due to higher retransmission consent revenues and higher
political advertising revenues at the Company's television stations due to the
2012 Presidential election. These revenue increases were partially offset by
lower advertising revenues at FOX primarily due to lower primetime ratings, the
absence of the Emmy® Awards, which was broadcast on FOX in fiscal 2012 and the
impact of the broadcast of the Summer Olympics on a different network.
For the three months ended September 30, 2012, operating income at the
Television segment increased $23 million, or 17%, as compared to the
corresponding period of fiscal 2012, primarily due to the revenue increases
noted above, partially offset by an increase in sports programming and
production costs principally related to the launch of Saturday night college
football broadcasts.
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Direct Broadcast Satellite Television (10% and 11% of the Company's consolidated
revenues in the first three months of fiscal 2013 and 2012, respectively)
For the three months ended September 30, 2012, SKY Italia's revenues decreased
$105 million, or 11%, as compared to the corresponding period of fiscal 2012.
For the three months ended September 30, 2012, revenues, on a local currency
basis, were relatively consistent with the corresponding period of fiscal 2012
as higher subscription revenues were offset by lower activation fees and pay per
view revenue. SKY Italia had a net decrease of approximately 40,000 subscribers
during the first quarter of fiscal 2013, which decreased SKY Italia's total
subscriber base to 4.9 million at September 30, 2012, reflecting the continued
challenging economic environment in Italy. The total churn for three months
ended September 30, 2012 was approximately 169,000 subscribers on an average
subscriber base of 4.9 million, as compared to churn of approximately 157,000
subscribers on an average subscriber base of 5.0 million in the corresponding
period of fiscal 2012. Subscriber churn for the period represents the number of
SKY Italia subscribers whose service was disconnected during the period. During
the three months ended September 30, 2012, the strengthening of the U.S. dollar
against the Euro resulted in a revenue decrease of approximately $107 million as
compared to the corresponding period of fiscal 2012.
Average revenue per subscriber ("ARPU") of approximately €41 in the three months
ended September 30, 2012 increased from approximately €40 reported in the
corresponding period of fiscal 2012, primarily due to a price increase. SKY
Italia calculates ARPU by dividing total subscriber-related revenues for the
period by the average subscribers for the period and dividing that amount by the
number of months in the period. Subscriber-related revenues are comprised of
total subscription revenue, pay-per-view revenue and equipment rental revenue
for the period. Average subscribers are calculated for the respective periods by
adding the beginning and ending subscribers for the period and dividing by two.
Subscriber acquisition costs per subscriber ("SAC") of approximately €415 in the
three months ended September 30, 2012 increased from the corresponding period of
fiscal 2012, primarily due to higher marketing costs on a per subscriber basis,
although total marketing expense was flat as compared to the corresponding prior
period. SAC is calculated by dividing total subscriber acquisition costs for a
period by the number of gross SKY Italia subscribers added during the
period. Subscriber acquisition costs include the cost of the commissions paid to
retailers and other distributors, the cost of equipment sold directly by SKY
Italia to subscribers and the costs related to installation and acquisition
advertising net of any upfront activation fee. SKY Italia excludes the value of
equipment capitalized under SKY Italia's equipment lease program, as well as
payments and the value of returned equipment related to disconnected lease
program subscribers from subscriber acquisition costs.
For the three months ended September 30, 2012, SKY Italia's operating income
decreased $96 million, or 81%, as compared to the corresponding period of fiscal
2012. On a local currency basis, expenses were higher by 12% primarily due to an
increase in sports programming costs resulting from the inclusion of $70 million
in rights cost associated with the broadcast of the Summer Olympics. During the
three months ended September 30, 2012, the strengthening of the U.S. dollar
against the Euro did not have a material impact on operating income.
Publishing (25% and 26% of the Company's consolidated revenues in the first
three months of fiscal 2013 and 2012, respectively)
For the three months ended September 30, 2012, revenues at the Publishing
segment decreased $51 million, or 2%, as compared to the corresponding period of
fiscal 2012, primarily due to lower advertising revenues. The revenue decreases
were partially offset by the inclusion of revenues from Thomas Nelson which was
acquired in fiscal 2013 and increased revenues at the U.K. newspapers primarily
due to the launch of the Sunday edition of The Sun in February 2012 and third
party printing contracts. The strengthening of the U.S. dollar against local
currencies resulted in a revenue decrease of approximately $17 million for the
three months ended September 30, 2012 as compared to the corresponding period of
fiscal 2012.
For the three months ended September 30, 2012, operating income at the
Publishing segment decreased $53 million, or 48%, as compared to the
corresponding period of fiscal 2012, primarily due to the revenue decreases
noted above and the inclusion of expenses at Thomas Nelson.
Other (2% of the Company's consolidated revenues in the first three months of
fiscal 2013 and 2012)
For the three months ended September 30, 2012, revenues at the Other segment
increased approximately $1 million, or 1%, as compared to the corresponding
period of fiscal 2012, primarily due to higher online advertising revenues at
REA Group, the Company's Australian online real estate advertising service, and
higher revenues at the Company's education business, partially offset by the
absence of revenues from News Outdoor Russia which was sold in July 2011.
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For the three months ended September 30, 2012, operating results at the Other
segment decreased $112 million, as compared to the corresponding period of
fiscal 2012, primarily due to the impact of legal and professional fees related
to The News of the World investigations and litigation and costs for related
civil settlements, higher stock based compensation expense and increased
operating losses of $15 million at the Company's education business, reflecting
higher product development costs.
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 flows. In addition, the Company has access to the
worldwide capital markets, subject to market conditions. As of September 30,
2012, 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. The capitalization of the
global publishing company that would be created through the proposed separation
of the Company's publishing and media and entertainment businesses into two
distinct publicly traded companies may affect the Company's liquidity position.
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 three months ended
September 30, 2012 and 2011 was as follows (in millions):
For the three months ended September 30, 2012 2011
Net cash provided by operating activities $ 710 $ 424
The increase in net cash provided by operating activities during the three
months ended September 30, 2012 as compared to the corresponding period of
fiscal 2012 primarily reflects lower sports rights payments at the DBS segment,
higher advertising receipts at the Television segment and lower income taxes
paid. These increases were partially offset by lower advertising receipts at the
Publishing segment.
Net cash provided by (used in) investing activities for the three months ended
September 30, 2012 and 2011 was as follows (in millions):
For the three months ended September 30, 2012 2011
Net cash provided by (used in) investing activities $ 1,461 $ (93 )
The change in net cash provided by investing activities during the three months
ended September 30, 2012 as compared to the corresponding period of fiscal 2012
was primarily due to the net cash proceeds received from the sale of NDS.
Net cash provided by (used in) financing activities for the three months ended
September 30, 2012 and 2011 was as follows (in millions):
For the three months ended September 30, 2012 2011
Net cash provided by (used in) financing activities $ 179 $ (1,315 )
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The change in net cash provided by financing activities during the three months
ended September 30, 2012 as compared to the corresponding period of fiscal 2012
was primarily due to the issuance of $1.0 billion of 3.00% Senior Notes due 2022
and lower share repurchases during the three months ended September 30, 2012 as
compared to the corresponding period of fiscal 2012.
The Company currently has approximately $4.5 billion remaining of the $10
billion stock repurchase program. The Company may repurchase the remaining
amount under the stock repurchase program in fiscal 2013 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
three months ended September 30, 2012 and 2011.
For the three months
ended September 30,
2012 2011
(in millions)
Borrowings:
Notes due September 2022(a) 988 -
Total borrowings $ 988 $ -
Repayment of borrowings:
Bank loans(a) - (32 )
Total repayment of borrowings $ - $ (32 )
(a) See Note 9-Borrowings 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 September 30,
2012.
Rating Agency Senior Debt Outlook
Moody's Baa1 Stable
S&P BBB+ CreditWatch/Negative
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
September 30, 2012 and June 30, 2012 were $68,726 million and $63,644 million,
respectively. The increase from June 30, 2012 was primarily due to the renewal
of rights to telecast certain MLB regular season and post season games through
the 2021 MLB season and the issuance of 3.00% Senior Notes due 2022.
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In October 2012, the Company signed an eight-year contract with NASCAR for the
renewal of rights to telecast the Daytona 500 and the first third of the Sprint
Cup Series through 2022.
Guarantees
The Company's guarantees as of September 30, 2012 have not changed significantly
from disclosures included in the 2012 Form 10-K.
In October 2012, the Company and the other joint-venture partners guaranteed the
debt of an equity associate. The Company's maximum obligation under this
guarantee is approximately $115 million.
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 after allegations of phone hacking and inappropriate payments to
public officials at our former publication, The News of the World, and other
related matters, including investigations into whether similar conduct may have
occurred at the Company's subsidiaries outside of the U.K. The Company is
cooperating with these investigations. It is possible that these proceedings
could damage our reputation and might impair our ability to conduct our
business.
The Company is not able to predict the ultimate outcome or cost associated with
these investigations. Violations of law may result in civil, administrative or
criminal fines or penalties. The Company has admitted liability in a number of
civil cases related to the phone hacking allegations and has settled a number of
cases. At September 30, 2012, the Company has provided for its best estimate of
the liability for the claims that have been filed. The Company has announced a
process under which parties can pursue claims against the Company, and
management believes that it is probable that additional claims will be filed. It
is not possible to estimate the liability for such additional claims 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. 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.
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.
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
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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 that continue to be at risk for
future impairment. Goodwill was $2.2 billion as of September 30, 2012 at these
reporting units where goodwill is at risk for future impairment. 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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