News (NWSA) - 2020 Q3 - Quarterly Report

Part I. Financial Information Financial Statements This section presents News Corporation's unaudited consolidated financial statements, encompassing Statements of Operations, Balance Sheets, and Cash Flows, with detailed notes Consolidated Statements of Operations The company reported a significant net loss for the three and nine months ended March 31, 2020, driven by impairment charges and declining revenues Consolidated Statements of Operations Highlights (in millions) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Nine Months Ended Mar 31, 2020 | Nine Months Ended Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $2,266 | $2,457 | $7,085 | $7,608 | | Impairment and restructuring charges | $(1,125) | $(34) | $(1,451) | $(71) | | (Loss) income before income tax | $(1,046) | $30 | $(1,123) | $382 | | Net (loss) income | $(1,036) | $23 | $(1,144) | $270 | | Net (loss) income attributable to News Corp stockholders | $(730) | $10 | $(872) | $206 | Consolidated Balance Sheets The balance sheet as of March 31, 2020, shows decreased total assets and equity, primarily due to reductions in Goodwill and Intangible assets Consolidated Balance Sheet Highlights (in millions) | Metric | As of Mar 31, 2020 (unaudited) | As of Jun 30, 2019 (audited) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,388 | $1,643 | | Goodwill | $3,831 | $5,147 | | Intangible assets, net | $1,846 | $2,426 | | Total assets | $14,428 | $15,711 | | Total current liabilities | $2,689 | $3,340 | | Borrowings (non-current) | $1,115 | $1,004 | | Total liabilities | $5,860 | $5,400 (Calculated) | | Total equity | $8,568 | $10,311 | Consolidated Statements of Cash Flows Net cash provided by operating activities decreased for the nine months ended March 31, 2020, alongside lower cash used in investing and financing activities Consolidated Cash Flow Highlights (in millions) | Metric | Nine Months Ended Mar 31, 2020 | Nine Months Ended Mar 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $462 | $661 | | Net cash used in investing activities | $(327) | $(523) | | Net cash used in financing activities | $(341) | $(501) | | Net change in cash and cash equivalents | $(206) | $(363) | Notes to the Unaudited Consolidated Financial Statements Detailed notes explain the company's accounting policies and financial results, covering revenue, impairment, borrowings, and legal contingencies - The company adopted the new lease accounting standard (ASU 2016-02) on July 1, 2019, resulting in the recognition of operating lease right-of-use assets of approximately $1.4 billion and corresponding lease liabilities[21][87] - On March 31, 2020, the company entered into a definitive agreement to sell its News America Marketing business, which was completed on May 5, 2020. The business was classified as held for sale, and a $175 million impairment charge was recognized[44][45] - Significant non-cash impairment charges of $1.1 billion were recognized in Q3 2020, primarily related to goodwill and intangible assets at the Foxtel ($931 million) and News America Marketing ($175 million) reporting units[50][51][52] - The company is involved in ongoing legal proceedings related to its former News America Marketing business (with Insignia and Valassis) and the U.K. Newspaper Matters. Liabilities are accrued, with a corresponding indemnification receivable from FOX for the U.K. matters[148][152][154] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, covering consolidated and segment results, COVID-19 impact, liquidity, and capital resources COVID-19 Impact The COVID-19 pandemic materially impacted operations, adversely affecting advertising, sales, and real estate, while impacting subscription video and book publishing - News and Information Services: Advertising and single-copy sales are expected to be adversely affected, though digital subscriptions have increased[207] - Subscription Video Services: Cancellation of sports events has led to fewer sports subscribers (e.g., Kayo) and is expected to impact churn and advertising revenue[208] - Digital Real Estate Services: Real estate markets in Australia and the U.S. are negatively impacted by social distancing, leading to lower listing volumes and revenue[209] - The company has implemented cost-savings initiatives, including reductions in discretionary spending, capital expenditures, and headcount, to offset the pandemic's impact[210] Results of Operations Consolidated revenues decreased by 8% and 7% for the quarter and nine-month periods respectively, leading to a net loss primarily due to $1.1 billion in impairment charges Consolidated Results Summary (in millions) | Metric | Three Months Ended Mar 31, 2020 | Change (YoY) | Nine Months Ended Mar 31, 2020 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $2,266 | -8% | $7,085 | -7% | | Operating expenses | $(1,281) | +9% | $(3,968) | +6% | | Impairment and restructuring charges | $(1,125) | N/M | $(1,451) | N/M | | Net (loss) income attributable to News Corp | $(730) | N/M | $(872) | N/M | - Foreign currency fluctuations had a negative impact on revenues of $78 million for the third quarter and $212 million for the nine-month period[220][222] - The significant increase in impairment charges was primarily due to a $931 million write-down at Foxtel and a $175 million charge related to the classification of News America Marketing as held for sale[230][231] Segment Analysis Total Segment EBITDA was relatively flat in Q3 at $242 million but decreased 16% for the nine-month period, with varied performance across segments Segment EBITDA (in millions) | Segment | Q3 2020 | Q3 2019 | % Change | Nine Months 2020 | Nine Months 2019 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | News and Information Services | $75 | $65 | 15% | $273 | $286 | -5% | | Subscription Video Services | $68 | $98 | -31% | $219 | $295 | -26% | | Book Publishing | $55 | $53 | 4% | $167 | $209 | -20% | | Digital Real Estate Services | $74 | $73 | 1% | $274 | $299 | -8% | | Total Segment EBITDA | $242 | $247 | -2% | $818 | $975 | -16% | - Foxtel's total paid subscribers increased to 2.93 million from 2.90 million a year ago, driven by growth in Kayo OTT subscribers, which more than offset the decline in broadcast residential subscribers[270] Liquidity and Capital Resources The company's liquidity relies on $1.39 billion cash on hand and internally generated funds, with net cash from operations decreasing to $462 million and free cash flow to $63 million - As of March 31, 2020, the company held $1.39 billion in cash and cash equivalents[284] - Free cash flow available to News Corporation for the nine months ended March 31, 2020 was $63 million, a decrease from $149 million in the prior year period, primarily due to lower cash from operations[297] - In December 2019, the company terminated its $650 million credit facility and entered into a new unsecured $750 million revolving credit facility, which was undrawn as of March 31, 2020[302] Quantitative and Qualitative Disclosures About Market Risk The company reports no material change in its assessment of market risk sensitivity since its last annual report - There has been no material change in the Company's assessment of its sensitivity to market risk since its last annual report[309] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[310] - No changes in internal control over financial reporting occurred during the third quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, these controls[311] Part II. Other Information Legal Proceedings This section updates ongoing legal proceedings involving News America Marketing, detailing antitrust litigation with Insignia Systems and Valassis Communications - In the case with Insignia Systems, Inc., the court denied motions to dismiss from both parties in April 2020, and the case is proceeding[314] - In the case with Valassis Communications, Inc., the court granted Valassis's motion to supplement its expert and pre-trial damages disclosures in April 2020, postponing the June 1, 2020 trial date[316] Risk Factors A new significant risk factor details the material adverse effects of the COVID-19 pandemic on the company's business, operations, and financial position - A new, detailed risk factor has been added concerning the COVID-19 pandemic, highlighting potential adverse impacts on revenues, supply chains, mitigation efforts, and the workforce[319] - The pandemic is expected to continue adversely impacting advertising revenues, print sales, commercial subscriptions, and real estate revenues due to economic downturns and business closures[319] - The ultimate impact of the pandemic is highly uncertain and depends on its duration, severity, and the effectiveness of containment measures, making it challenging for management to estimate future performance[321]