10-Q 1 d287944d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2011

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from             to            

Commission file number 001-32352

 

 

NEWS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   26-0075658

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1211 Avenue of the Americas, New York, New York   10036
(Address of Principal Executive Offices)   (Zip Code)

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 February 3, 2012, 1,675,542,925 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 six months ended December 31, 2011 and 2010

     3   
 

Consolidated Balance Sheets at December 31, 2011 (unaudited) and June 30, 2011 (audited)

     4   
 

Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2011 and 2010

     5   
 

Notes to the Unaudited Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     65   

Item 4.

 

Controls and Procedures

     67   

Part II. Other Information

  

Item 1.

 

Legal Proceedings

     68   

Item 1A.

 

Risk Factors

     73   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     77   

Item 3.

 

Defaults Upon Senior Securities

     78   

Item 4.

 

Mine Safety Disclosures

     78   

Item 5.

 

Other Information

     78   

Item 6.

 

Exhibits

     78   

Signature

     79   

 

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NEWS CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

     For the three months
ended December 31,
    For the six months
ended December 31,
 
     2011     2010     2011     2010  

Revenues

   $ 8,975     $ 8,761     $ 16,934     $ 16,187  

Operating expenses

     (5,583     (5,605     (10,336     (10,148

Selling, general and administrative

     (1,614     (1,589     (3,141     (3,050

Depreciation and amortization

     (281     (280     (575     (554

Impairment and restructuring charges

     (36     (275     (127     (282

Equity earnings of affiliates

     142       67       263       161  

Interest expense, net

     (257     (230     (515     (462

Interest income

     29       28       65       54  

Other, net

     125       (12     (5     (22
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     1,500       865       2,563       1,884  

Income tax expense

     (373     (190     (650     (400
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,127       675       1,913       1,484  

Less: Net income attributable to noncontrolling interests

     (70     (33     (118     (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to News Corporation stockholders

   $ 1,057     $ 642     $ 1,795     $ 1,417  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares:

        

Basic

     2,508       2,625       2,557       2,624  

Diluted

     2,515       2,628       2,563       2,627  

Net income attributable to News Corporation stockholders per share:

        

Basic

   $ 0.42     $ 0.24     $ 0.70     $ 0.54  

Diluted

   $ 0.42     $ 0.24     $ 0.70     $ 0.54  

 

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)

 

     At December 31,
2011
     At June 30,
2011
 
     (unaudited)      (audited)  

Assets:

     

Current assets:

     

Cash and cash equivalents

   $ 9,432      $ 12,680  

Receivables, net

     7,151        6,330  

Inventories, net

     2,872        2,332  

Other

     669        442  
  

 

 

    

 

 

 

Total current assets

     20,124        21,784  
  

 

 

    

 

 

 

Non-current assets:

     

Receivables

     412        350  

Investments

     4,499        4,867  

Inventories, net

     4,594        4,198  

Property, plant and equipment, net

     5,940        6,542  

Intangible assets, net

     8,277        8,587  

Goodwill

     15,018        14,697  

Other non-current assets

     1,072        955  
  

 

 

    

 

 

 

Total assets

   $ 59,936      $ 61,980  
  

 

 

    

 

 

 

Liabilities and Equity:

     

Current liabilities:

     

Borrowings

   $ —         $ 32  

Accounts payable, accrued expenses and other current liabilities

     5,344        5,773  

Participations, residuals and royalties payable

     1,784        1,511  

Program rights payable

     1,316        1,298  

Deferred revenue

     958        957  
  

 

 

    

 

 

 

Total current liabilities

     9,402        9,571  
  

 

 

    

 

 

 

Non-current liabilities:

     

Borrowings

     15,454        15,463  

Other liabilities

     2,973        2,908  

Deferred income taxes

     3,571        3,712  

Redeemable noncontrolling interests

     587        242  

Commitments and contingencies

     

Equity:

     

Class A common stock (1)

     17        18  

Class B common stock (2)

     8        8  

Additional paid-in capital

     16,701        17,435  

Retained earnings and accumulated other comprehensive income

     10,728        12,045  
  

 

 

    

 

 

 

Total News Corporation stockholders’ equity

     27,454        29,506  

Noncontrolling interests

     495        578  
  

 

 

    

 

 

 

Total equity

     27,949        30,084  
  

 

 

    

 

 

 

Total liabilities and equity

   $ 59,936      $ 61,980  
  

 

 

    

 

 

 

 

(1)

Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 1,683,805,907 shares and 1,828,315,242 shares issued and outstanding, net of 1,776,521,027 and 1,776,534,202 treasury shares at par at December 31, 2011 and June 30, 2011, respectively.

(2)

Class B common stock, $0.01 par value per share, 3,000,000,000 shares authorized, 798,520,953 shares issued and outstanding, net of 313,721,702 treasury shares at par at December 31, 2011 and June 30, 2011, 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 six months ended
December 31,
 
         2011             2010      

Operating activities:

    

Net income

   $ 1,913     $ 1,484  

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     575       554  

Amortization of cable distribution investments

     47       48  

Equity earnings of affiliates

     (263     (161

Cash distributions received from affiliates

     253       161  

Impairment charges

     —          168  

Other, net

     5       22  

Change in operating assets and liabilities, net of acquisitions:

    

Receivables and other assets

     (1,202     (715

Inventories, net

     (758     (906

Accounts payable and other liabilities

     26       (2
  

 

 

   

 

 

 

Net cash provided by operating activities

     596       653  
  

 

 

   

 

 

 

Investing activities:

    

Property, plant and equipment, net of acquisitions

     (485     (555

Acquisitions, net of cash acquired

     (488     (31

Investments in equity affiliates

     (37     (256

Other investments

     (158     (23

Proceeds from dispositions

     321       109  
  

 

 

   

 

 

 

Net cash used in investing activities

     (847     (756
  

 

 

   

 

 

 

Financing activities:

    

Borrowings

     —          12  

Repayment of borrowings

     (32     (29

Issuance of shares

     15       —     

Repurchase of shares

     (2,477     —     

Dividends paid

     (305     (245

Purchase of subsidiary shares from noncontrolling interests

     —          (104

Sale of subsidiary shares to noncontrolling interests

     —          50  
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,799     (316
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,050     (419

Cash and cash equivalents, beginning of period

     12,680       8,709  

Exchange movement on opening cash balance

     (198     166  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 9,432     $ 8,456  
  

 

 

   

 

 

 

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 (“DBS”), 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, 2012.

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, 2011 as filed with the Securities and Exchange Commission (“SEC”) on August 15, 2011 (the “2011 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 has an unconsolidated investment in a variable interest entity (“VIE”) and the Company’s aggregate risk of loss related to this unconsolidated VIE was approximately $480 million and $544 million as of December 31, 2011 and June 30, 2011, respectively, which consisted of debt and equity securities and a loan and was included in Investments in the consolidated balance sheets. In addition, the Company has agreed to backstop approximately $395 million of financing measures that are being initiated by this VIE and has also agreed to provide an additional loan to this VIE of approximately $70 million. These amounts have not been requested yet by this VIE.

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 2012 includes 52 weeks, while fiscal 2011 included 53 weeks with the 53rd week falling in the fourth fiscal quarter. All references to December 31, 2011 and December 31, 2010 relate to the three and six month periods ended January 1, 2012 and December 26, 2010, respectively. For convenience purposes, the Company continues to date its financial statements as of December 31.

Certain fiscal 2011 amounts have been reclassified to conform to the fiscal 2012 presentation.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Adopted and Recently Issued Accounting Guidance

Adopted

The Company accounts for programming rights for its multi-year U.S. national sports agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 920, “Entertainment—Broadcasters” (“ASC 920”). Under ASC 920, programming rights are carried at the lower of unamortized cost or estimated net realizable value. At the inception of these contracts, and at least annually, the Company evaluates the recoverability of the total remaining contract costs plus programming rights for each multi-year U.S. national sports agreement using estimated remaining revenues and expenses directly related to each agreement. If such evaluation indicates that an agreement would result in an ultimate loss, the programming rights would be written down to net realizable value. In addition, where the ultimate loss exceeds the recorded asset, an incremental liability would be recorded to currently recognize the estimated future loss.

In the first quarter of fiscal 2012, the Company voluntarily changed its method of recognizing losses on its multi-year U.S. national sports agreements by no longer accruing for estimated future losses. The Company will, however, continue to recognize programming rights at the lower of unamortized cost or estimated net realizable value in accordance with ASC 920. The Company believes that this method is preferable because the change will (1) align the Company’s policy with peer companies in the media industry; (2) result in better correspondence with the substance of the event being recognized as estimated future losses will no longer be recognized; and (3) limit the effect of judgment on any potential impairment loss because the impairment analysis, which involves significant judgment about future revenue and revenue allocations, will only affect programming rights on the balance sheet. Retrospective application of the change in accounting policy had no effect on the consolidated financial statements of the Company for any of the periods presented.

Issued

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amended ASC 820, “Fair Value Measurement” (“ASC 820”), to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards (IFRSs). Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures. The amendments are to be applied prospectively and were effective for the Company beginning January 1, 2012. The adoption of ASU 2011-04 is not intended to result in a change in the application of the current requirements, but will impact financial statement disclosures.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”), to defer the requirement in ASU 2011-05 that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both other comprehensive income and net income on the face of the financial statements. ASU 2011-12 requires companies to continue to present amounts reclassified out of AOCI on the face of the financial statements or disclose them in the notes to the financial statements. These provisions are effective for the Company beginning July 1, 2012 and will be applied retrospectively. The Company does not expect the adoption of this standard will have a significant impact on its consolidated financial statements as it will only impact presentation.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), which permits an entity to make a qualitative assessment of 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. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2011-08 is effective for the Company for annual and interim goodwill impairment tests performed beginning July 1, 2012, however, early adoption is permitted. The Company is currently evaluating the impact ASU 2011-08 will have on its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-09, “Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan” (“ASU 2011-09”). ASU 2011-09 requires enhanced qualitative and quantitative disclosures about an employer’s participation in multiemployer pension plans, including additional information about the plans, the level of an employer’s participation in the plans and the financial health of significant plans. ASU 2011-09 is effective for the Company beginning April 1, 2012. The Company is currently evaluating the impact ASU 2011-09 will have on its consolidated financial statements.

Note 2—Acquisitions, Disposals and Other Transactions

Fiscal 2012

Acquisitions

In October 2011, the Company entered into an agreement to acquire Thomas Nelson, Inc., one of the leading trade publishers in the United States, for approximately $200 million. The acquisition is subject to regulatory clearances and other customary closing conditions.

In December 2011, the Company acquired a 67% equity interest in Fox Pan American Sports LLC (“FPAS”) for approximately $400 million. The Company previously owned (i) an approximate 33% equity interest in 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 Central and South American nations, and (ii) 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 results of FPAS are included in the Company’s consolidated results of operations beginning in December 2011.

The FPAS acquisition was accounted for in accordance with ASC 805, “Business Combinations” (“ASC 805”), which requires an acquirer to remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. 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 three and six months ended December 31, 2011. In accordance with ASC 350, “Intangibles-Goodwill and Other” (“ASC 350”), the excess purchase price preliminarily allocated to goodwill will not be amortized for the FPAS acquisition. The amount allocated to goodwill is subject to change pending the completion of final valuations of certain assets and liabilities. A future reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets could reduce future earnings as a result of additional amortization.

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Disposition

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 six months ended December 31, 2011. 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.

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 police. 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 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, including investigations into whether similar conduct may have occurred at the Company’s subsidiaries outside of the U.K. The Company is fully 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 has taken steps to solve the problems relating to The News of the World including the creation of an independently-chaired Management & Standards Committee (the “MSC”), which operates independently from News International Group Limited (“News International”) and has full authority to ensure complete cooperation with all relevant investigations and inquiries into The News of the World matters and all other related issues across News International. The MSC will also conduct its own internal investigation where appropriate. The MSC has an independent Chairman, Lord Grabiner QC, and reports directly to Joel Klein, Executive Vice President and a director of the Company. Mr. Klein 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 is conducting an internal investigation of the three other titles at News International and has engaged independent outside counsel to advise it on these investigations and all other matters it handles. News International announced that it would implement new compliance, ethics and governance procedures that it hopes will become a standard for the industry. The MSC has hired a leading law firm to recommend a series of policies, practices and systems to create a more robust governance, compliance and legal structure. The Company has also engaged independent outside counsel to assist it in responding to U.S. governmental inquiries. (See Note 14—Contingencies for a summary of the costs of The News of the World Investigations and Litigation.)

The Company is actively marketing its former U.K. newspaper division headquarters located in East London, which it relocated from in August 2010. As of December 31, 2011, the estimated selling price, less the cost to sell this facility, was in excess of its book value. This asset held for sale, which is not material to the Company, has been reclassified from Property, plant and equipment, net to Other current assets as of December 31, 2011 and is no longer being depreciated. The Company expects to complete a sale of this facility within one year.

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 Regional Sports Networks (“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

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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 as of December 31, 2011.

Fiscal 2011

During the first quarter of fiscal 2011, the Company acquired an additional interest in Asianet Communications Limited (“Asianet”), an Asian general entertainment television joint venture, for approximately $92 million in cash. As a result of this transaction, the Company increased its interest in Asianet to 75% from the 51% it owned at June 30, 2010.

In November 2010, the Company formed a joint venture with China Media Capital (“CMC”), a media fund in China, to explore new growth opportunities. The Company transferred the equity and related assets of its STAR China business along with the Fortune Star Chinese movie library with a combined market value of approximately $140 million and CMC paid cash of approximately $74 million to the Company. Following this transaction, CMC holds a 53% controlling stake in the joint venture and the Company holds a 47% stake. The Company’s interest in the joint venture was recorded at fair value of $66 million, which was determined using a discounted cash flow valuation method and is now accounted for under the equity method of accounting. The Company recorded a gain on this transaction which was included in Other, net in the consolidated statements of operations. (See Note 17—Additional Financial Information)

In December 2010, the Company disposed of the Fox Mobile Group (“Fox Mobile”) and recorded a loss on the disposition which was included in Other, net in the consolidated statements of operations. (See Note 17—Additional Financial Information) The net income, assets, liabilities and cash flow attributable to the Fox Mobile operations were not material to the Company in any of the periods presented and, accordingly, have not been presented separately.

In fiscal 2011, the Company acquired Wireless Generation, an education technology company, for cash. Total consideration was approximately $390 million, which included the equity purchase and the repayment of Wireless Generation’s outstanding debt.

In April 2011, the Company acquired Shine Limited (“Shine”), an international television production company, for cash. The total consideration for this acquisition included (i) approximately $480 million for the acquisition of the equity, of which approximately $60 million has been set aside in escrow to satisfy any indemnification obligations, (ii) the repayment of Shine’s outstanding debt of approximately $135 million and (iii) net liabilities assumed. Elisabeth Murdoch, Chairman and Chief Executive Officer of Shine, and daughter of Mr. K. R. Murdoch and sister of Messrs. Lachlan and James Murdoch, received approximately $214 million in cash at closing in consideration for her majority ownership interest in Shine, and is entitled to her proportionate share of amounts that are released from escrow.

The aforementioned acquisitions were accounted for in accordance with ASC 805. In accordance with ASC 350 the excess purchase price that has been allocated or has been preliminarily allocated to goodwill is not being amortized for all of the acquisitions noted above. Where the allocation of the excess purchase price is not final, the amount allocated to goodwill is subject to change upon completion of final valuations of certain assets and liabilities. A future reduction in goodwill for additional value to be assigned to identifiable finite-lived intangible assets or tangible assets could reduce future earnings as a result of additional amortization.

In June 2011, the Company transferred the equity and related assets of Myspace to a digital media company in exchange for an equity interest in the acquirer. As a result of this transaction, the Company’s interest in the acquirer, which is not material, was recorded at fair value and is now accounted for under the cost method of

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

accounting. The loss on this transaction was approximately $254 million, net of tax of $61 million, or ($0.10) per diluted share and was included in Loss on disposition of discontinued operations, net of tax in the consolidated statements of operations for the fiscal year ended June 30, 2011. The assets, liabilities and cash flow attributable to the Myspace operations were not material to the Company in any of the periods presented and, accordingly, have not been presented separately. Revenues attributable to Myspace for the three and six months ended December 31, 2010 were $32 million and $80 million, respectively. Operating losses attributable to Myspace for the three and six months ended December 31, 2010 were $69 million and $118 million, respectively.

Note 3—Receivables, net

Receivables, net 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 December 31, 2011 and June 30, 2011, these allowances were not material.

Receivables, net consisted of:

 

     At
December 31,
2011
    At
June 30,
2011
 
     (in millions)  

Total receivables

   $ 8,816     $ 7,779  

Allowances for returns and doubtful accounts

     (1,253     (1,099
  

 

 

   

 

 

 

Total receivables, net

     7,563       6,680  

Less: current receivables, net

     (7,151     (6,330
  

 

 

   

 

 

 

Non-current receivables, net

   $ 412     $ 350  
  

 

 

   

 

 

 

Note 4—Restructuring Programs

The Company recorded restructuring charges of $36 million and $127 million in the three and six months ended December 31, 2011, respectively, of which $32 million and $120 million, respectively, related to the newspaper businesses. The Company has reorganized portions of the newspaper businesses and has recorded restructuring charges primarily for termination benefits as a result of the shutdown of The News of the World and certain organizational restructurings at other newspapers.

In fiscal 2011, the Company recorded restructuring charges of approximately $145 million, of which $107 million and $114 million were recorded during the three and six months ended December 31, 2010, respectively. The fiscal 2011 restructuring charges primarily consisted of a $115 million charge related to the Company’s digital media properties and $25 million related to termination benefits recorded at the newspaper businesses. The charges at the Company’s digital media properties were a result of an organizational restructuring to align resources more closely with business priorities and consisted of facility related costs of $95 million, termination benefits of $18 million and other associated costs of $2 million.

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company expects to record an additional $76 million of restructuring charges, principally related to accretion on facility termination obligations through fiscal 2021 and additional termination benefits related to the newspaper businesses. At December 31, 2011, restructuring liabilities of approximately $93 million and $161 million were included in the consolidated balance sheets in other current liabilities and other liabilities, respectively. Amounts included in other liabilities primarily relate to facility termination obligations, which are expected to be paid through fiscal 2021.

Changes in the program liabilities were as follows:

 

     For the three months ended December 31, 2011     For the three months ended December 31, 2010  
     One time
termination
    benefits    
    Facility
related
    costs    
    Other
costs
        Total         One time
termination
    benefits    
    Facility
related
    costs    
    Other
costs
        Total      
     (in millions)     (in millions)  

Beginning of period

   $ 74     $ 201     $ 1     $ 276     $ 18     $ 149     $ 6     $ 173  

Additions

     28       3       5       36       17       88       2       107  

Payments

     (43     (8     (2     (53     (5     (8     —          (13

Other

     —          (1     (4     (5     (1     —          (1     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 59     $ 195     $ —        $ 254     $ 29     $ 229     $ 7     $ 265  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     For the six months ended December 31, 2011     For the six months ended December 31, 2010  
     One time
termination
benefits
    Facility
related
costs
    Other
costs
    Total     One time
termination
benefits
    Facility
related
costs
    Other
costs
    Total  
     (in millions)     (in millions)  

Beginning of period

   $ 27     $ 207     $ —        $ 234     $ 32     $ 154     $ 6     $ 192  

Additions

     102       6       19       127       22       90       2       114  

Payments

     (65     (18     (12     (95     (25     (15     —          (40

Other

     (5     —          (7     (12     —          —          (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 59     $ 195     $ —        $ 254     $ 29     $ 229     $ 7     $ 265  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5—Inventories, net

The Company’s inventories were comprised of the following:

 

     At
December 31,
2011
    At
June 30,
2011
 
     (in millions)  

Programming rights

   $ 4,337     $ 3,512  

Books, DVDs, Blu-rays, paper and other merchandise

     391       373  

Filmed entertainment costs:

    

Films:

    

Released (including acquired film libraries)

     759       755  

Completed, not released

     10       31  

In production

     810       784  

In development or preproduction

     138       98  
  

 

 

   

 

 

 
     1,717       1,668  
  

 

 

   

 

 

 

Television productions:

    

Released (including acquired libraries)

     561       617  

In production

     459       356  

In development or preproduction

     1       4  
  

 

 

   

 

 

 
     1,021       977  
  

 

 

   

 

 

 

Total filmed entertainment costs, less accumulated amortization (a)

     2,738       2,645  
  

 

 

   

 

 

 

Total inventories, net

     7,466       6,530  

Less: current portion of inventory, net (b)

     (2,872     (2,332
  

 

 

   

 

 

 

Total noncurrent inventories, net

   $ 4,594     $ 4,198  
  

 

 

   

 

 

 

 

(a) 

Does not include $413 million and $428 million of net intangible film library costs as of December 31, 2011 and June 30, 2011, respectively, which are included in intangible assets subject to amortization in the consolidated balance sheets.

(b) 

Current inventory as of December 31, 2011 and June 30, 2011 was comprised of programming rights ($2,515 million and $1,995 million, respectively), books, DVDs, Blu-rays, paper and other merchandise.

Note 6—Investments

The Company’s investments were comprised of the following:

 

           Ownership
Percentage
    At
December 31,
2011
     At
June 30,
2011
 
                (in millions)  

Equity method investments:

          

British Sky Broadcasting Group plc (a)

   U.K. DBS operator      39 %     $ 1,568      $ 1,532  

NDS

   Digital technology company      49 %       440        423  

Sky Network Television Ltd. (a)

   New Zealand media company      44 %       378        424  

Sky Deutschland AG (a)

   German pay-TV operator      49.9     190        304  

Other equity method investments

        various        1,061        1,107  

Fair value of available-for-sale investments

        various        416        652  

Other investments

        various        446        425  
       

 

 

    

 

 

 
        $ 4,499      $ 4,867  
       

 

 

    

 

 

 

 

(a) 

The market value of the Company’s investment in British Sky Broadcasting Group plc (“BSkyB”), Sky Deutschland AG (“Sky Deutschland”) and Sky Network Television Ltd., was $7,757 million, $644 million and $700 million at December 31, 2011, respectively.

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The cost basis, unrealized gains, unrealized losses and fair market value of available-for-sale investments are set forth below:

 

     At
December 31,
2011
     At
June 30,
2011
 
     (in millions)  

Cost basis of available-for-sale investments

   $ 270      $ 269  

Accumulated gross unrealized gain

     146        383  
  

 

 

    

 

 

 

Fair value of available-for-sale investments

   $ 416      $ 652  
  

 

 

    

 

 

 

Net deferred tax liability (a)

   $ 58      $ 132  
  

 

 

    

 

 

 

 

(a) 

The net deferred tax liability includes $68 million and $113 million related to unrealized gains recorded in comprehensive income as of December 31, 2011 and June 30, 2011, respectively.

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 of 700 pence per share 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 unaudited consolidated statements of operations for the six months ended December 31, 2011.

In November 2011, BSkyB’s shareholders and board of directors authorized a 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, the Company received cash consideration of approximately $53 million during the second quarter of fiscal 2012 and recognized a gain of approximately $44 million which was included in Equity earnings of affiliates in the unaudited consolidated statements of operations for the three and six months ended December 31, 2011.

Sky Deutschland

In fiscal 2011, the Company entered into an agreement with Sky Deutschland to backstop €400 million (approximately $525 million) of financing measures that were being initiated by Sky Deutschland. The financing measures were executed in stages and completed in December 2011. The first capital increase was structured as a rights issue in which the Company purchased additional shares of Sky Deutschland for approximately $150 million in September 2010. In the second capital increase, the Company purchased a convertible bond for approximately $225 million in January 2011. In December 2011, as part of the third capital increase, the Company provided a loan of approximately $80 million with a maturity date of March 2014.

The Company currently has the right to convert the bond from the second capital increase 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 bond for cash upon its maturity in January 2015. The convertible bond was separated into its host and derivative financial instrument components, both of which are recorded at their estimated fair

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

value in Investments in the consolidated balance sheets. The change in estimated fair value of the derivative instrument of approximately $7 million and $89 million was recorded in Other, net in the unaudited consolidated statements of operations for the three and six months ended December 31, 2011, respectively.

On February 2, 2012, the Company agreed to backstop €300 million (approximately $395 million) of financing measures that are being initiated by Sky Deutschland. Currently, the Company’s shareholding in Sky Deutschland is not expected to exceed 49.9% as a result of these financing measures. The financing measures will be executed in two stages and are expected to be completed by no later than September 30, 2012. The first capital increase of a minimum of €100 million (approximately $130 million) is expected to be completed by the end of March 2012 and will be raised through any or a combination of the following measures: a rights offering, a private placement, and/or a loan provided by the Company. The second capital increase is expected to be raised by Sky Deutschland by the end of September 2012 and is planned through any or a combination of the measures mentioned above and/or a convertible bond underlying Sky Deutschland shares. In the event that a convertible bond is issued, the aggregate €300 million funding will be increased by the amount of interest payable on the bond from the date of issue until December 31, 2013. The Company’s backstop commitment is subject to certain customary conditions such as the absence of a material adverse change in Sky Deutschland’s business.

In addition to the financing measures noted above, the Company has also agreed to loan Sky Deutschland approximately $70 million to support the launch of a sports news channel which it expects to fund in fiscal 2012.

Other

In August 2010, the Company increased its investment in Tata Sky Ltd. (“Tata Sky”) for approximately $88 million in cash. As a result of this transaction, the Company increased its interest in Tata Sky to approximately 30% from the 20% it owned at June 30, 2010.

Note 7—Fair Value

In accordance with ASC 820, fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”); (ii) inputs other than quoted prices included within Level 1 that 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).

The tables below present information about financial assets and liabilities carried at fair value on a recurring basis:

 

     Fair Value Measurements  
     December 31, 2011  

Description

   Total     Quoted Prices
in Active
Markets for
Identical
Instruments

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (in millions)  

Assets

          

Available-for-sale securities (1)

   $ 416     $ 233      $ 183      $ —     

Derivatives (2)

     32       —           32        —     

Redeemable noncontrolling interests (3)

     (587     —           —           (587
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ (139   $ 233      $ 215      $ (587
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     June 30, 2011  

Description

   Total     Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
     (in millions)  

Assets

         

Available-for-sale securities (1)

   $ 652     $ 360      $ 292     $ —     

Liabilities

         

Derivatives (2)

     (22     —           (22     —     

Redeemable noncontrolling interests (3)

     (242     —           —          (242
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 388     $ 360      $ 270     $ (242
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

See Note 6—Investments.

(2) 

Represents derivatives associated with the Company’s foreign exchange forward contracts designated as hedges.

(3) 

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 December 31, 2011 and June 30, 2011, 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 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 earnings before interest, taxes, depreciation and amortization (“EBITDA”) valuation model, assuming a 9% discount rate for the other RSN. At December 31, 2011, 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. Subsequent to December 31, 2011, the minority shareholder’s put right became 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 six months ended
December 31,
 
     2011     2010  
     (in millions)  

Beginning of period

   $ (242   $ (325

Total losses included in net income

     (34     (7

Total gains (losses) included in other comprehensive income

     —          —     

Issuance of redeemable noncontrolling interest

     (273  

Other

     (38     12  
  

 

 

   

 

 

 

End of period

   $ (587   $ (320
  

 

 

   

 

 

 

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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 December 31, 2011 was approximately $17,697 million compared with a carrying value of $15,454 million and, at June 30, 2011, was approximately $17,152 million compared with a carrying value of $15,495 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 with foreign currency risk outstanding at December 31, 2011 and June 30, 2011 was $496 million and $766 million, respectively. As of December 31, 2011 and June 30, 2011, the fair values of the foreign exchange forward contracts of approximately $32 million and $(22) 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 and six months ended December 31, 2011 of $9 million and $55 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 December 31, 2011 and 2010, the Company reclassified gains of approximately $5 million and nil, respectively, from other comprehensive income to net income. During the six months ended December 31, 2011 and 2010, the Company reclassified gains of approximately $1 million and $9 million, respectively, from other comprehensive 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.

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 at December 31, 2011 or June 30, 2011 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 December 31, 2011, the Company did not anticipate nonperformance by any of the counterparties.

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8—Goodwill and Other Intangible Assets

The increase in the carrying value of goodwill during the six months ended December 31, 2011 was primarily due to the consolidation of FPAS in December 2011, partially offset by foreign currency adjustments and the News Outdoor Russia disposition in July 2011.

During the second quarter of fiscal 2011, the Company performed an interim impairment review of its Digital Media Group reporting unit’s goodwill as a result of lower than expected earnings and cash flows relative to the assumptions utilized in its fiscal 2010 annual impairment review, as well as the organizational restructuring at this reporting unit. As a result of the review performed, the Company recorded a non-cash goodwill impairment charge of $168 million in the three and six months ended December 31, 2011.

The Company’s goodwill impairment review was determined using a two-step process. The first step of the process was to compare the fair value of the reporting unit with its carrying amount, including goodwill. In performing the first step, the Company determined the fair value of the reporting unit by primarily using a discounted cash flow analysis and market-based valuation approach methodologies. Determining fair value required the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows. The cash flows employed in the analyses were 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 were based on an assessment of the risk inherent in the future cash flows of the respective reporting unit. In assessing the reasonableness of its determined fair values, the Company evaluated its results against other value indicators, such as comparable public company trading values. As the carrying amount of the reporting unit exceeded its fair value, the second step of the goodwill impairment review was required to be performed to estimate the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill was 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 was 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 was compared with the carrying amount of that goodwill. As the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess.

Note 9—Borrowings

Notes due 2021 and 2041

In February 2011, News America Incorporated (“NAI”), a wholly-owned subsidiary of the Company, issued $1.0 billion of 4.50% Senior Notes due 2021 and $1.5 billion of 6.15% Senior Notes due 2041. The net proceeds of $2.5 billion will be used for general corporate purposes, including the recent refinancing of near term maturities.

LYONs

In February 2001, NAI issued Liquid Yield OptionTM Notes (“LYONs”) which paid no interest and had an aggregate principal amount at maturity of $1,515 million, representing a yield of 3.5% per annum on the issue price. The notes were recorded at a discount and were being accreted using the effective interest rate method. On February 28, 2006, 92% of the LYONs were redeemed for cash at the specified redemption amount of $594.25 per LYON. Accordingly, NAI paid an aggregate of approximately $831 million to the holders of the LYONs that had exercised this redemption option.

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The remaining notes were redeemable at the option of the holders on February 28, 2011 at a price of $706.82 per LYON. During fiscal 2011, the outstanding LYONs were redeemed for cash of approximately $82 million.

Other

In August 2006, the Company entered into a loan agreement with Raiffeisen Zentralbank Österreich AG (“RZB”), which was subsequently amended in September 2009. As of June 30, 2011, $32 million was outstanding under this loan agreement which was classified as current borrowings. The Company repaid this amount in July 2011 in connection with the disposal of News Outdoor Russia. (See Note 2—Acquisitions, Disposals and Other Transactions)

In February 2011, NAI completed a tender offer on a portion of the $500 million of 9.25% Senior Debentures due February 1, 2013 and retired, at a premium, an aggregate principal amount of approximately $227 million. The loss on early extinguishment of debt was approximately $36 million which was included in Other, net in the consolidated statements of operations for the fiscal year ended June 30, 2011.

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 the second quarter of fiscal 2011, the Company bought out the ownership interests of a group of third party investors in an existing slate of films and extended its co-financing arrangement with such investors for an additional two years for production starts through August 1, 2012. The Company negotiated a buy out of the investors’ remaining interests in their underlying slate of films, at a price that was based on the then remaining projected future cash flows that the investors would have received from the slate.

Note 11—Equity

The following table summarizes changes in equity:

 

    For the three months ended December 31,  
    2011     2010  
    News
Corporation
Stockholders
    Noncontrolling
Interests
    Total
Equity
    News
Corporation
Stockholders
    Noncontrolling
Interests
    Total
Equity
 
    (in millions)  

Balance, beginning of period

  $ 27,366     $ 490      $ 27,856     $ 26,573     $ 436      $ 27,009  

Net income

    1,057       43 (a)      1,100       642       33 (a)      675  

Other comprehensive income

    234       5 (b)      239       140       4 (b)      144  

(Cancellation) issuance of shares, net

    (1,196     —          (1,196     2       —          2  

Other

    (7     (43 )(c)      (50     57       (22 )(c)      35  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

  $ 27,454     $ 495      $ 27,949     $ 27,414     $ 451      $ 27,865  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    For the six months ended December 31,  
    2011     2010  
    News
Corporation
Stockholders
    Noncontrolling
Interests
    Total
Equity
    News
Corporation
Stockholders
    Noncontrolling
Interests
    Total
Equity
 
    (in millions)  

Balance, beginning of period

  $ 29,506     $ 578      $ 30,084     $ 25,113     $ 428      $ 25,541  

Net income

    1,795       84 (a)      1,879       1,417       60 (a)      1,477  

Other comprehensive (loss) income

    (1,081     (4 )(b)      (1,085     1,111       8 (b)      1,119  

(Cancellation) issuance of shares, net

    (2,400     —          (2,400     53       —          53  

Dividends declared

    (246     —          (246     (197     —          (197

Other

    (120     (163 )(c)      (283     (83     (45 )(c)      (128
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

  $ 27,454     $ 495      $ 27,949     $ 27,414     $ 451      $ 27,865  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Net income attributable to noncontrolling interests excludes $27 million and nil for the three months ended December 31, 2011 and 2010, respectively, and $34 million and $7 million for the six months ended December 31, 2011 and 2010, respectively, relating to redeemable noncontrolling interests which are reflected in temporary equity.

(b) 

Other comprehensive income (loss) attributable to noncontrolling interests excludes nil for the three and six months ended December 31, 2011 and 2010.

(c)

Other activity attributable to noncontrolling interests excludes $316 million and $(4) million for the three months ended December 31, 2011 and 2010, respectively, and $311 million and $(12) million for the six months ended December 31, 2011 and 2010, respectively, relating to redeemable noncontrolling interests.

Dividends

The Company declared a dividend of $0.095 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 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.

The Company declared a dividend of $0.075 per share on both the Class A Common Stock and the Class B Common Stock in the three months ended September 30, 2010, which was paid in October 2010 to stockholders of record on September 8, 2010. The total aggregate dividend paid to stockholders in October 2010 was approximately $197 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 is payable on April 18, 2012. The record date for determining dividend entitlements is March 14, 2012.

Stock Repurchase Program

The Board had 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. The remaining authorized amount under the Company’s stock repurchase program at December 31, 2011, excluding commissions, was approximately $2.5 billion.

 

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Note 12—Equity-Based Compensation

The following table summarizes the Company’s equity-based compensation transactions:

 

     For the three months
ended December 31,
     For the six months
ended December 31,
 
     2011      2010      2011      2010  
     (in millions)  

Equity-based compensation

   $ 56      $ 30      $ 107      $ 75  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash received from exercise of equity-based compensation

   $ 7      $ —         $ 8      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011, the Company’s total compensation cost related to non-vested stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) not yet recognized for all equity-based compensation plans was approximately $259 million, the majority of which is expected to be recognized over the next three fiscal years. Compensation expense on all equity-based awards is generally recognized on a straight-line basis over the vesting period of the entire award. However, certain performance based awards are recognized on an accelerated basis.

Stock option activity during the six months ended December 31, 2011 and 2010 was not material. The intrinsic value of the stock options outstanding as of December 31, 2011 and June 30, 2011 was $17 million and $11 million, respectively.

At December 31, 2011 and June 30, 2011, the liability for cash-settled awards was approximately $72 million and $58 million, respectively.

The Company recognized a tax benefit (expense) on vested RSUs and stock options exercised of approximately $7 million and $(3) million for the six months ended December 31, 2011 and 2010, respectively.

Performance Stock Units

PSUs are fair valued on the date of grant and expensed using a straight-line method as the awards cliff vest at the end of the three year performance period. The Company also estimates the number of shares expected to vest which is based on management’s determination of the probable outcome of the performance condition, which requires considerable judgment. The Company records a cumulative adjustment in periods that the Company’s estimate of the number of shares expected to vest changes. Additionally, the Company ultimately adjusts the expense recognized to reflect the actual vested shares following the resolution of the performance conditions.

In the first quarter of fiscal 2012, certain executives of the Company responsible for various business units within the Company each received a grant of PSUs that has a three year performance measurement period beginning in July 2011. The awards are subject to the achievement of pre-defined goals for operating profit, cash flow and key divisional performance indicators for the applicable performance period. The majority of these awards will be settled in shares of Class A Common Stock.

In August 2011 and 2010, the Compensation Committee approved a grant of PSUs that has a three year performance measurement period beginning for the fiscal years ending June 30, 2012 and 2011, respectively. For executive directors of the Company, each PSU represents the right to receive the U.S. dollar value of one share of Class A Common Stock in cash after the completion of the three year performance period, subject to the satisfaction of one or more pre-established objective performance measures determined by the Compensation Committee. These awards have a graded vesting and the expense recognition is accelerated.

 

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In fiscal 2012 and 2011, a total of 8.5 million and 1.8 million target PSUs were issued, respectively, of which 6.6 million and nil, respectively, will be settled in shares of Class A Common Stock.

Restricted Stock Units

During the six months ended December 31, 2011 and 2010, approximately 6.5 million and 13.0 million RSUs were issued, respectively, of which 6.4 million and 10.5 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 six months ended December 31, 2011 and 2010, approximately 8.2 million and 8.4 million RSUs vested, respectively, of which approximately 7.0 million and 6.9 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 $113 million and $89 million for the six months ended December 31, 2011 and 2010, respectively. The remaining 1.2 million and 1.5 million RSUs settled during the six months ended December 31, 2011 and 2010, respectively, were settled in cash of approximately $19 million in both periods, before statutory tax withholdings.

Note 13—Commitments and Guarantees

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 repayments as of December 31, 2011 and June 30, 2011 were $61,824 million and $49,132 million, respectively. The increase from June 30, 2011 was primarily due to the new agreement with the National Football League, renewals of certain rights at our RSNs and international sports programming rights.

Guarantees

The Company’s guarantees have not changed significantly from the disclosures included in the 2011 Form 10-K.

Note 14—Contingencies

Intermix

On August 26, 2005 and August 30, 2005, two purported class action lawsuits captioned, respectively, Ron Sheppard v. Richard Rosenblatt et. al., and John Friedmann v. Intermix Media, Inc. et al., were filed in the California Superior Court, County of Los Angeles. Both lawsuits named as defendants all of the then incumbent members of the board of directors of Intermix Media, Inc. (“Intermix”), including Mr. Rosenblatt, Intermix’s former Chief Executive Officer, and certain entities affiliated with VantagePoint Venture Partners (“VantagePoint”), a former major Intermix stockholder. The complaints alleged that, in pursuing the transaction whereby Intermix was to be acquired by Fox Interactive Media, a subsidiary of the Company (the “FIM Transaction”), and approving the related merger agreement, the director defendants breached their fiduciary duties to Intermix stockholders by, among other things, engaging in self-dealing and failing to obtain the highest price reasonably available for Intermix and its stockholders. The complaints further alleged that the merger agreement resulted from a flawed process and that the defendants tailored the terms of the merger to advance their own interests. The FIM Transaction was consummated on September 30, 2005. The Friedmann and

 

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Sheppard lawsuits were subsequently consolidated and, on January 17, 2006, a consolidated amended complaint was filed (the “Intermix Media Shareholder Litigation”). The plaintiffs in the consolidated action sought various forms of declaratory relief, damages, disgorgement and fees and costs. On March 20, 2006, the court ordered that substantially identical claims asserted in a separate state action filed by Brad Greenspan, captioned Greenspan v. Intermix Media, Inc., et al., be severed and related to the Intermix Media Shareholder Litigation. The defendants filed demurrers seeking dismissal of all claims in the Intermix Media Shareholder Litigation and the severed Greenspan claims. On October 6, 2006, the court sustained the demurrers without leave to amend. On December 13, 2006, the court dismissed the complaints and entered judgment for the defendants. Greenspan and plaintiffs in the Intermix Media Shareholder Litigation filed notices of appeal. The Court of Appeal heard arguments on the fully briefed appeal on October 23, 2008. On November 11, 2008, the Court of Appeal issued an unpublished opinion affirming the lower court’s dismissal on all counts. On December 19, 2008, stockholder appellants filed a Petition for Review with the California Supreme Court. The California Supreme Court denied review on February 18, 2009 and the judgment is now final.

In November 2005, plaintiff in a derivative action captioned LeBoyer v. Greenspan et al. pending against various former Intermix directors and officers in the United States District Court for the Central District of California filed a First Amended Class and Derivative Complaint (the “Amended Complaint”). The original derivative action was filed in May 2003 and arose out of Intermix’s restatement of quarterly financial results for its fiscal year ended March 31, 2003. A substantially similar derivative action filed in Los Angeles Superior Court was dismissed based on the inability of the plaintiffs to plead adequately demand futility. The Amended Complaint added various allegations and purported class claims arising out of the FIM Transaction that are substantially similar to those asserted in the Intermix Media Shareholder Litigation. The Amended Complaint also added as defendants the individuals and entities named in the Intermix Media Shareholder Litigation that were not already defendants in the matter. On October 16, 2006, the court dismissed the fourth through seventh claims for relief, which related to the 2003 restatement, finding that the plaintiff is precluded from relitigating demand futility. At the same time, the court asked for further briefing regarding plaintiffs’ standing to assert derivative claims based on the FIM Transaction, including for alleged violation of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the effect of the state judge’s dismissal of the claims in the Greenspan case and the Intermix Media Shareholder Litigation on the remaining direct class action claims alleging breaches of fiduciary duty and other common law claims leading up to the FIM Transaction. The parties filed the requested additional briefing in which the defendants requested that the court stay the direct LeBoyer claims pending the resolution of any appeal in the Greenspan case and the Intermix Media Shareholder Litigation. By order dated May 22, 2007, the court granted defendants’ motion to dismiss the derivative claims arising out of the FIM Transaction, and denied the defendants’ request to stay the two remaining direct claims. As explained in more detail in the next paragraph, the court subsequently consolidated this case with the Brown v. Brewer action also pending before the court. On July 11, 2007, plaintiffs filed the consolidated first amended complaint under the Brown case title. See the discussion of the Brown case below for the subsequent developments in the consolidated case.

On June 14, 2006, a purported class action lawsuit, captioned Jim Brown v. Brett C. Brewer, et al., was filed against certain former Intermix directors and officers in the United States District Court for the Central District of California. The plaintiff asserted claims for alleged violations of Section 14(a) of the Exchange Act and SEC Rule 14a-9, as well as control person liability under Section 20(a) of the Exchange Act. The plaintiff alleged that certain defendants disseminated false and misleading definitive proxy statements on two occasions: one on December 30, 2003 in connection with the stockholder vote on January 29, 2004 on the election of directors and ratification of financing transactions with certain entities of VantagePoint; and another on August 25, 2005 in connection with the stockholder vote on the FIM Transaction. The complaint named as defendants certain VantagePoint related entities, the former general counsel and the members of the Intermix Board who were

 

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incumbent on the dates of the respective proxy statements. Intermix was not named as a defendant, but has certain indemnity obligations to the former officer and director defendants in connection with these claims and allegations. On August 25, 2006, plaintiff amended his complaint to add certain investment banks (the “Investment Banks”) as defendants. Intermix has certain indemnity obligations to the Investment Banks as well. Plaintiff amended his complaint again on September 27, 2006, which defendants moved to dismiss. On February 9, 2007, the case was transferred to Judge George H. King, the judge assigned to the LeBoyer action, on the grounds that it raises substantially related questions of law and fact as LeBoyer, and would entail substantial duplication of labor if heard by different judges. On June 11, 2007, Judge King ordered the Brown case be consolidated with the LeBoyer action, ordered plaintiffs’ counsel to file a consolidated first amended complaint, and further ordered the parties to file a joint brief on defendants’ contemplated motion to dismiss the consolidated first amended complaint. On July 11, 2007, plaintiffs filed the consolidated first amended complaint, which defendants moved to dismiss. By order dated January 17, 2008, Judge King granted defendants’ motion to dismiss the 2003 proxy claims (concerning VantagePoint transactions) and the 2005 proxy claims (concerning the FIM Transaction), as well as a claim against the VantagePoint entities alleging unjust enrichment. The court found it unnecessary to rule on dismissal of the remaining claims, which are related to the 2005 FIM Transaction, because the dismissal disposed of those claims. On February 8, 2008, plaintiffs filed a consolidated second amended complaint, which defendants moved to dismiss on February 28, 2008. By order dated July 15, 2008, the court granted in part and denied in part defendants’ motion to dismiss. The 2003 claims and the claims against the Investment Banks were dismissed with prejudice. The Section 14(a), Section 20(a) and the breach of fiduciary duty claims related to the FIM Transaction remain against the officer and director defendants and the VantagePoint defendants. On November 14, 2008, plaintiff filed a motion for class certification to which defendants filed their opposition on January 14, 2009. On June 22, 2009, the court granted plaintiff’s motion for class certification, certifying a class of all holders of Intermix common stock from July 18, 2005 through consummation of the FIM Transaction, who were allegedly harmed by defendants’ improper conduct as set forth in the complaint. The parties have completed fact and expert discovery. On June 17, 2010, the court granted in part and denied in part defendants’ summary judgment motion filed on October 19, 2009. Specifically, the court denied plaintiff’s motion for summary adjudication of a factual issue and denied defendants’ motion to exclude plaintiff’s damages expert, which was filed on November 30, 2009. In the court’s June 17, 2010 order, the court found that plaintiff could not proceed on any fiduciary duty claim based upon alleged violations of the duty of care, but found material issues of fact prohibiting summary judgment on alleged violations of fiduciary duty of loyalty. On plaintiff’s Section 14(a) claim, the court found material issues of fact that prohibited summary judgment on the entire claim, but granted defendants’ motion as to certain purported omissions, finding the allegedly omitted information immaterial. Further, the court granted defendants’ motion as to two damage theories for the Section 14(a) claim, finding benefit of the bargain damages not viable and lost opportunity damages too speculative, and permitting plaintiff to proceed only based upon a theory of out-of-pocket damages. No trial date was set. On October 21, 2010, the parties agreed to a settlement of the action, which is subject to approval by the court. A formal stipulation of settlement was submitted to the court for its approval on December 28, 2010 and the Company recognized the terms of this settlement in its results of operations. The terms of this settlement were not material to the Company. On February 18, 2011, the court granted preliminary approval of the settlement. Plaintiff’s counsel supervised notice of the settlement to the class. The notice provided class members with an opportunity to object. Two shareholders filed objections to the settlement with the court in April 2011. Both objectors had counsel appear on their behalf at a hearing on May 16, 2011 where the court considered plaintiff’s motion for final approval of the settlement and plaintiff’s counsel’s motion for attorneys’ fees, which will come out of the settlement funds. At the hearing, the court did not rule on the motions and instead ordered that plaintiff, objector Trafelet & Co., and defendants submit joint briefing with respect to certain of Trafelet’s objections. The joint brief was filed on June 10, 2011. The joint brief narrowed the objections to allocation of the settlement amount and sufficiency of the notice as it pertains to how the settlement funds will be allocated. The joint brief contained no objection to the settlement itself. On

 

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September 29, 2011, the court entered an order rejecting the settlement in so far as the court found that the proposed plan of allocation was not fair, adequate and reasonable because certain members of the certified class are releasing their claims under the settlement, but under the proposed plan, they will not be receiving any of the settlement proceeds. The court ordered the parties to submit a new plan of allocation within 30 days and stated that it will issue appropriate orders after reviewing the new plan. The court order had no effect on the settlement amount. Plaintiff and Trafelet submitted competing revised plans of allocation of the settlement proceeds. On December 19, 2011, the court set a hearing for January 12, 2012 to consider these plans and whether further notice should be provided to the class if the court were to approve a revised plan of allocation. The court heard argument on the issues of allocation and notice on January 12, 2012. The court has not issued its formal order setting forth the revised plan of allocation yet. Any objections to the revised plan are set to be heard by the court on March 19, 2012.

Shareholder Litigation

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.

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 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,

 

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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 court has entered a renewed scheduling order whereby the defendants are scheduled to move to dismiss the Second Amended Complaint. The defendants filed opening briefs in support of such motions on November 14, 2011. Plaintiffs filed their answering briefs on December 23, 2011. Reply briefs in support of the motions to dismiss were filed on January 31, 2012. There is no hearing date set.

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 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

 

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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 December 8, 2011, the defendants and the Company, as a nominal defendant, served their motion to stay. Opposition briefs were served by Stricklin, Iron Workers and Shields. Reply briefs in support of the motion to stay were filed on January 24, 2012. No hearing date is set. In the Wilder Litigation, there are competing motions for appointment of lead plaintiff and lead counsel pending.

The Company and its Board of Directors believe these shareholder claims are entirely without merit, and intend to vigorously defend these actions.

The News of the World Investigations and Litigation

U.K. and U.S. regulators and governmental authorities are conducting investigations initiated in 2011 after allegations of phone hacking and inappropriate payments to police 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 fully 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. As of December 31, 2011, 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 early stage of this matter and 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 incurred $87 million and $104 million in legal and

 

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professional fees related to The News of the World investigations and litigation described above and costs for related civil settlements for the three and six months ended December 31, 2011, respectively, which were included in Selling, general and administrative expenses in the unaudited consolidated statements of operations.

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. While the complaints contain some substantive differences, the cases are similar and 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 defendants filed a motion with the Judicial Panel on Multidistrict Litigation (“JPML”) to transfer and consolidate these various class actions in the Southern District of New York. That motion to transfer and consolidate was heard by the JPML on December 1, 2011. Shortly thereafter, the JPML transferred twenty-seven of the cases to the Honorable Denise L. Cote in the Southern District of New York. It is anticipated that the remaining two cases will be similarly transferred. On December 20, 2011, Judge Cote held a status conference and set a schedule for the multi-district litigation. 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’ response is due on March 2, 2012. On January 26, 2012, one of the class plaintiffs voluntarily dismissed his complaint without prejudice.

In addition, certain federal and state agencies in the United States and governmental competition agencies in the European Union are conducting investigations into the same alleged conduct by certain publishers, including HarperCollins. 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 currently is cooperating with these investigations.

While it is not possible to predict with any degree of certainty the ultimate outcome of the class actions and investigations, especially given their early stages, HarperCollins believes it was compliant with applicable antitrust and competition laws and intends to defend itself vigorously.

News America Marketing

Insignia Systems, Inc

On September 23, 2004, Insignia Systems, Inc. (“Insignia”) filed an action against News America Marketing In-Store Inc. (“News America”) in the United States District Court for the District of Minnesota. The operative complaint alleges, among other things, disparagement of Insignia by News America in violation of the Lanham Act and Minnesota state law and various federal and state antitrust violations arising out of Insignia’s and News America’s competition in the domestic in-store advertising market. The trial began on February 8, 2011. On February 9, 2011, the parties settled the lawsuit. Under the terms of the settlement, which included no admission of liability, News America paid Insignia $125 million, which was recorded in Selling, general and administrative expenses during the fiscal year ended June 30, 2011. In addition, Insignia paid News America $4 million in relation to a 10-year exclusive business arrangement between the companies.

Other

Other than previously disclosed in the notes to these consolidated financial statements, the Company is party to several purchase and sale arrangements which become exercisable over the next ten years by the Company or

 

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the counter-party to the agreement. None of these arrangements that become 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. Accordingly, the fair values of such purchase arrangements are classified in Redeemable noncontrolling interests.

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, the Company was unable to estimate the amount of loss or range of loss.

Note 15—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:

 

      Pension Benefits     Postretirement Benefits  
     For the three months ended December 31,  
     2011     2010     2011     2010  
     (in millions)  

Service cost benefits earned during the period

   $ 24     $ 24     $ 2     $ 1  

Interest costs on projected benefit obligation

     45       43       4       4  

Expected return on plan assets

     (47     (42     —          —     

Amortization of deferred losses

     11       14       —          —     

Other

     1       1       (5     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic costs

   $ 34     $ 40     $ 1     $ 1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash contributions

   $ 13     $ 10     $ 5     $ 5  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     For the six months ended December 31,  
     2011     2010     2011     2010  
     (in millions)  

Service cost benefits earned during the period

   $ 48     $ 48     $ 3     $ 2  

Interest costs on projected benefit obligation

     89       85       8       8  

Expected return on plan assets

     (93     (84     —          —     

Amortization of deferred losses

     24       29       —          —     

Other

     5       2       (9     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic costs

   $ 73     $ 80     $ 2     $ 2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash contributions

   $ 29     $ 24     $ 10     $ 9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 16—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.

 

   

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.

 

   

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 146 newspapers in Australia, the publication of a metropolitan newspaper and a national newspaper (with international editions) in the United States and the provision of information services. 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 Wireless Generation, the Company’s education technology business.

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.

 

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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.

 

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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).

 

     For the three months ended
December 31,
    For the six months ended
December 31,
 
         2011             2010             2011             2010      
     (in millions)  

Revenues:

        

Cable Network Programming

   $ 2,161     $ 1,974     $ 4,281     $ 3,846  

Filmed Entertainment

     2,063       1,809       3,841       3,312  

Television

     1,520       1,369       2,443       2,220  

Direct Broadcast Satellite Television

     947       944       1,869       1,800  

Publishing

     2,130       2,346       4,199       4,392  

Other

     154       319       301       617  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 8,975     $ 8,761     $ 16,934     $ 16,187  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss):

        

Cable Network Programming

   $ 882     $ 735     $ 1,657     $ 1,394  

Filmed Entertainment

     393       189       740       469  

Television

     189       151       322       256  

Direct Broadcast Satellite Television

     6       (12     125       70  

Publishing

     218       380       328       558  

Other

     (191     (156     (290     (312
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating income

     1,497       1,287       2,882       2,435  
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment and restructuring charges

     (36     (275     (127     (282

Equity earnings of affiliates

     142       67       263       161  

Interest expense, net

     (257     (230     (515     (462

Interest income

     29       28       65       54  

Other, net

     125       (12     (5     (22
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     1,500       865       2,563       1,884  

Income tax expense

     (373     (190     (650     (400
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,127       675       1,913       1,484  

Less: Net income attributable to noncontrolling interests

     (70     (33     (118     (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to News Corporation stockholders

   $ 1,057     $ 642     $ 1,795     $ 1,417  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Intersegment revenues, generated primarily by the Filmed Entertainment segment, of approximately $277 million and $279 million for the three months ended December 31, 2011 and 2010, respectively, and of approximately $533 million and $447 million for the six months ended December 31, 2011 and 2010, respectively, have been eliminated within the Filmed Entertainment segment. Intersegment operating profit generated primarily by the Filmed Entertainment segment of approximately $8 million and $13 million for the three months ended December 31, 2011 and 2010, respectively, and of approximately $47 million and $29 million for the six months ended December 31, 2011 and 2010, respectively, have been eliminated within the Filmed Entertainment segment.

 

     For the three months ended December 31, 2011  
     Segment operating
income (loss)
    Depreciation and
amortization
     Amortization
of cable
distribution
investments
     Segment operating
income (loss)
before
depreciation and
amortization
 
     (in millions)  

Cable Network Programming

   $ 882     $ 38      $ 23      $ 943  

Filmed Entertainment

     393       23        —           416  

Television

     189       21        —           210  

Direct Broadcast Satellite Television

     6       78        —           84  

Publishing

     218       106        —           324  

Other

     (191     15        —           (176
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 1,497     $ 281      $ 23      $ 1,801  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

     For the three months ended December 31, 2010  
     Segment operating
income (loss)
    Depreciation and
amortization
     Amortization
of cable
distribution
investments
     Segment operating
income (loss)
before
depreciation and
amortization
 
     (in millions)  

Cable Network Programming

   $ 735     $ 38      $ 27      $ 800  

Filmed Entertainment

     189       22        —           211  

Television

     151       21        —           172  

Direct Broadcast Satellite Television

     (12     71        —           59  

Publishing

     380       96        —           476  

Other

     (156     32        —           (124
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 1,287     $ 280      $ 27      $ 1,594  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

     For the six months ended December 31, 2011  
     Segment operating
income (loss)
    Depreciation and
amortization
     Amortization
of cable
distribution
investments
     Segment operating
income (loss)
before
depreciation and
amortization
 
     (in millions)  

Cable Network Programming

   $ 1,657     $ 75      $ 47      $ 1,779  

Filmed Entertainment

     740       62        —           802  

Television

     322       42        —           364  

Direct Broadcast Satellite Television

     125       152        —           277  

Publishing

     328       213        —           541  

Other

     (290     31        —           (259
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 2,882     $ 575      $ 47      $ 3,504  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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     For the six months ended December 31, 2010  
     Segment operating
income (loss)
    Depreciation and
amortization
     Amortization
of cable
distribution
investments
     Segment operating
income (loss)
before
depreciation and
amortization
 
     (in millions)  

Cable Network Programming

   $ 1,394     $ 75      $ 48      $ 1,517  

Filmed Entertainment

     469       45        —           514  

Television

     256       42        —           298  

Direct Broadcast Satellite Television

     70       132        —           202  

Publishing

     558       189        —           747  

Other

     (312     71        —           (241
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 2,435     $ 554      $ 48      $ 3,037  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

     At
December 31,
2011
     At
June 30,
2011
 
     (in millions)  

Total assets:

     

Cable Network Programming

   $ 13,894      $ 12,666  

Filmed Entertainment

     8,606        8,015  

Television

     6,752        6,062  

Direct Broadcast Satellite Television

     2,605        3,098  

Publishing

     13,785        14,915  

Other

     9,795        12,357  

Investments

     4,499        4,867  
  

 

 

    

 

 

 

Total assets

   $ 59,936      $ 61,980  
  

 

 

    

 

 

 

Goodwill and Intangible assets, net:

     

Cable Network Programming

   $ 7,369      $ 6,808  

Filmed Entertainment

     2,507        2,552  

Television

     4,318        4,320  

Direct Broadcast Satellite Television

     568        636  

Publishing

     7,243        7,377  

Other

     1,290        1,591  
  

 

 

    

 

 

 

Total goodwill and intangible assets, net

   $ 23,295      $ 23,284  
  

 

 

    

 

 

 

 

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Note 17—Additional Financial Information

Supplemental Cash Flows Information

 

     For the six months ended
December 31,
 
         2011             2010      
     (in millions)  

Supplemental cash flows information:

    

Cash paid for income taxes

   $ (791   $ (565

Cash paid for interest

     (526     (471

Sale of other investments

     3       56  

Purchase of other investments

     (161     (79

Supplemental information on businesses acquired:

    

Fair value of assets acquired

     768       23  

Cash acquired

     22       —     

Liabilities assumed

     (25     9  

Noncontrolling interest decrease (increase)

     18       (1

Cash paid

     (510     (31
  

 

 

   

 

 

 

Fair value of equity instruments issued to third parties

     273       —     

Issuance of subsidiary units

     (273     —     
  

 

 

   

 

 

 

Fair value of equity instruments consideration

   $ —        $ —     
  

 

 

   

 

 

 

Other, net

Other, net consisted of the following:

 

      For the three months ended
December 31,
    For the six months ended
December 31,
 
          2011             2010             2011             2010      
     (in millions)  

Gain on FPAS transaction (a)

   $ 158     $ —        $ 158     $ —     

Change in fair value of SkyD convertible securities (b)

     (7     —          (89     —     

BSkyB termination fee (b)

     —          —          (63     —     

Gain on STAR China transaction (a)

     —          57       —          57  

Loss on disposal of Fox Mobile (a)

     —          (28     —          (28

Other

     (26     (41     (11     (51
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other, net

   $ 125     $ (12   $ (5   $ (22
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

See Note 2—Acquisitions, Disposals and Other Transactions

(b) 

See Note 6—Investments

 

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Comprehensive Income

In accordance with ASC 220, “Comprehensive Income,” total comprehensive income for the Company consisted of the following:

 

      For the three months ended
December 31,
    For the six months ended
December 31,
 
         2011             2010             2011             2010      
     (in millions)     (in millions)  

Net income, as reported

   $ 1,127     $ 675     $ 1,913     $ 1,484  

Other comprehensive income:

        

Foreign currency translation adjustments

     196       139       (1,020     1,051  

Unrealized holding gains (losses) on securities, net of tax

     39       (6     (83     54  

Benefit plan adjustments

     4       11       18       14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     1,366       819       828       2,603  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: net income attributable to noncontrolling
interests
(a)

     (70     (33     (118     (67

Less: foreign currency translation adjustments attributable to noncontrolling interests (a)

     (5     (4     4       (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to News Corporation stockholders

   $ 1,291     $ 782     $ 714     $ 2,528  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Includes amounts relating to noncontrolling interests classified as equity and redeemable noncontrolling interests.

Note 18—Supplemental Guarantor Information

In May 2007, NAI, a 100% owned subsidiary of the Company as defined in Rule 3-10(h) of Regulation S-X, entered into a credit agreement (the “Credit Agreement”), among NAI as Borrower, the Company as Parent Guarantor, the lenders named therein (the “Lenders”), Citibank, N.A. as Administrative Agent and JPMorgan Chase Bank, N.A. as Syndication Agent. The Credit Agreement provides a $2.25 billion unsecured revolving credit facility with a sub-limit of $600 million available for the issuance of letters of credit and has a maturity date of May 2012. Borrowings are in U.S. dollars only, while letters of credit are issuable in U.S. dollars or Euros. The significant terms of the agreement include the requirement that the Company maintain specific leverage ratios and limitations on secured indebtedness. NAI pays a facility fee of 0.08% regardless of facility usage. NAI pays interest for borrowings at LIBOR plus 0.27% and pays commission fees on letters of credit at 0.27%. NAI pays an additional fee of 0.05% if borrowings under the facility exceed 50% of the committed facility. The interest and fees are based on the Company’s current debt rating.

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.

 

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended December 31, 2011

(in millions)

 

     News
America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and

Eliminations
    News
Corporation
and
Subsidiaries
 

Revenues

   $ —        $ —        $ 8,975     $ —        $ 8,975  

Expenses

     (128     —          (7,386     —          (7,514

Equity earnings (losses) of affiliates

     (2     —          144       —          142  

Interest expense, net

     (374     (336     (4     457       (257

Interest income

     1       2       483       (457     29  

Earnings (losses) from subsidiary entities

     49       1,390       —          (1,439     —     

Other, net

     (4     1       128       —          125  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

     (458     1,057       2,340       (1,439     1,500  

Income tax (expense) benefit

     114       —          (580     93       (373
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (344     1,057       1,760       (1,346     1,127  

Less: Net income attributable to noncontrolling interests

     —          —          (70     —          (70
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to News Corporation stockholders

   $ (344   $ 1,057     $ 1,690     $ (1,346   $ 1,057  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

37


Table of Contents

NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations

For the three months ended December 31, 2010

(in millions)

 

     News
America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and
Eliminations
    News
Corporation
and
Subsidiaries
 

Revenues

   $ —        $ —        $ 8,761     $ —        $ 8,761  

Expenses

     (83     —          (7,666     —          (7,749

Equity earnings (losses) of affiliates

     (1     —          68       —          67  

Interest expense, net

     (338     (273     (3     384       (230

Interest income

     —          2       410       (384     28  

Earnings (losses) from subsidiary entities

     101       921       —          (1,022     —     

Other, net

     15       (8     1       (20     (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

     (306     642       1,571       (1,042     865  

Income tax (expense) benefit

     67       —          (345     88       (190
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (239     642       1,226       (954     675  

Less: Net income attributable to noncontrolling interests

     —          —          (33     —          (33
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to News Corporation stockholders

   $ (239   $ 642     $ 1,193     $ (954   $ 642  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

38


Table of Contents

NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations

For the six months ended December 31, 2011

(in millions)

 

     News
America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and
Eliminations
    News
Corporation
and

Subsidiaries
 

Revenues

   $ —        $ —        $ 16,934     $ —        $ 16,934  

Expenses

     (205     —          (13,974     —          (14,179

Equity earnings (losses) of affiliates

     (4     —          267       —          263  

Interest expense, net

     (746     (672     (7     910       (515

Interest income

     2       4       969       (910     65  

Earnings (losses) from subsidiary entities

     162       2,527       —          (2,689     —     

Other, net

     9       (64     50       —          (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

     (782     1,795       4,239       (2,689     2,563  

Income tax (expense) benefit

     198       —          (1,075     227       (650
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (584     1,795       3,164       (2,462     1,913  

Less: Net income attributable to noncontrolling interests

     —          —          (118     —          (118
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to News Corporation stockholders

   $ (584   $ 1,795     $ 3,046     $ (2,462   $ 1,795  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

39


Table of Contents

NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations

For the six months ended December 31, 2010

(in millions)

 

     News
America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and
Eliminations
    News
Corporation
and
Subsidiaries
 

Revenues

   $ —        $ —        $ 16,187     $ —        $ 16,187  

Expenses

     (165     —          (13,869     —          (14,034

Equity earnings (losses) of affiliates

     (3     —          164       —          161  

Interest expense, net

     (685     (536     (7     766       (462

Interest income

     1       3       816       (766     54  

Earnings (losses) from subsidiary entities

     314       1,965       —          (2,279     —     

Other, net

     (8     (15     21       (20     (22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

     (546     1,417       3,312       (2,299     1,884  

Income tax (expense) benefit

     116       —          (703     187       (400
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (430     1,417       2,609       (2,112     1,484  

Less: Net income attributable to noncontrolling interests

     —          —          (67     —          (67
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to News Corporation stockholders

   $ (430   $ 1,417     $ 2,542     $ (2,112   $ 1,417  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

40


Table of Contents

NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Balance Sheet

At December 31, 2011

(in millions)

 

     News
America
Incorporated
     News
Corporation
     Non-Guarantor     Reclassifications
and
Eliminations
    News
Corporation
and
Subsidiaries
 

ASSETS:

            

Current assets:

            

Cash and cash equivalents

   $ 766      $ 5,826      $ 2,840     $ —        $ 9,432  

Receivables, net

     23        —           7,128       —          7,151  

Inventories, net

     —           —           2,872       —          2,872  

Other

     25        27        617       —          669  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     814        5,853        13,457       —          20,124  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-current assets:

            

Receivables

     —           —           412       —          412  

Inventories, net

     —           —           4,594       —          4,594  

Property, plant and equipment, net

     96        —           5,844       —          5,940  

Intangible assets, net

     —           —           8,277       —          8,277  

Goodwill

     —           —           15,018       —          15,018  

Other

     335        4        733       —          1,072  

Investments

            

Investments in associated companies and other investments

     114        39        4,346       —          4,499  

Intragroup investments

     49,239        49,850        —          (99,089     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total investments

     49,353        49,889        4,346       (99,089     4,499  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 50,598      $ 55,746      $ 52,681     $ (99,089   $ 59,936  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Borrowings

   $ —         $ —         $ —        $ —        $ —     

Other current liabilities

     88        —           9,314       —          9,402  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     88        —           9,314       —          9,402  

Non-current liabilities:

            

Borrowings

     15,454        —           —          —          15,454  

Other non-current liabilities

     218        —           6,326       —          6,544  

Intercompany

     26,752        28,292        (55,044     —          —     

Redeemable noncontrolling interests

     —           —           587       —          587  

Equity

     8,086        27,454        91,498       (99,089     27,949  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 50,598      $ 55,746      $ 52,681     $ (99,089   $ 59,936  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

41


Table of Contents

NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Balance Sheet

At June 30, 2011

(in millions)

 

     News
America
Incorporated
     News
Corporation
     Non-Guarantor     Reclassifications
and
Eliminations
    News
Corporation
and
Subsidiaries
 

ASSETS

            

Current Assets:

            

Cash and cash equivalents

   $ 360      $ 7,816      $ 4,504     $ —        $ 12,680  

Receivables, net

     14        —           6,316       —          6,330  

Inventories, net

     —           —           2,332       —          2,332  

Other

     15        —           427       —          442  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     389        7,816        13,579       —          21,784  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-current assets:

            

Receivables

     —           —           350       —          350  

Inventories, net

     —           —           4,198       —          4,198  

Property, plant and equipment, net

     100        —           6,442       —          6,542  

Intangible assets, net

     —           —           8,587       —          8,587  

Goodwill

     —           —           14,697       —          14,697  

Other non-current assets

     323        —           632       —          955  

Investments:

            

Investments in associated companies and other investments

     125        52        4,690       —          4,867  

Intragroup investments

     50,146        48,502        —          (98,648     —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total investments

     50,271        48,554        4,690       (98,648     4,867  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 51,083      $ 56,370      $ 53,175     $ (98,648   $ 61,980  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Borrowings

   $ —         $ —         $ 32     $ —        $ 32  

Other current liabilities

     91        22        9,426       —          9,539  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     91        22        9,458       —          9,571  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Non-current liabilities:

            

Borrowings

     15,463        —           —          —          15,463  

Other non-current liabilities

     202        —           6,418       —          6,620  

Intercompany

     25,884        26,842        (52,726     —          —     

Redeemable noncontrolling interests

     —           —           242       —          242  

Total equity

     9,443        29,506        89,783       (98,648     30,084  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 51,083      $ 56,370      $ 53,175     $ (98,648   $ 61,980  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to supplemental guarantor information

 

42


Table of Contents

NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the six months ended December 31, 2011

(in millions)

 

     News
America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and
Eliminations
     News
Corporation
and
Subsidiaries
 

Operating activities:

           

Net cash provided by (used in) operating activities

   $ 418     $ 706     $ (528   $ —         $ 596  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Investing and other activities:

           

Property, plant and equipment, net of acquisitions

     (8     —          (477     —           (485

Investments

     (4     —          (679     —           (683

Proceeds from dispositions

     —          11       310       —           321  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by investing activities

     (12     11       (846     —           (847
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing activities:

           

Repayment of borrowings

     —          —          (32     —           (32

Issuance of shares

     —          15       —          —           15  

Repurchase of shares

     —          (2,477     —          —           (2,477

Dividends paid

     —          (245     (60     —           (305
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     —          (2,707     (92     —           (2,799
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     406       (1,990     (1,466     —           (3,050

Cash and cash equivalents, beginning of period

     360       7,816       4,504       —           12,680  

Exchange movement on opening cash balance

     —          —          (198     —           (198
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 766     $ 5,826     $ 2,840     $ —         $ 9,432  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See notes to supplemental guarantor information

 

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NEWS CORPORATION

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the six months ended December 31, 2010

(in millions)

 

     News
America
Incorporated
    News
Corporation
    Non-Guarantor     Reclassifications
and
Eliminations
     News
Corporation
and
Subsidiaries
 

Operating activities:

           

Net cash provided by (used in) operating activities

   $ (4,858   $ 4,473     $ 1,038     $ —         $ 653  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Investing activities:

           

Property, plant and equipment, net of acquisitions

     (11     —          (544     —           (555

Investments

     (10     —          (300     —           (310

Proceeds from dispositions

     —          —          109       —           109  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (21     —          (735     —           (756
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing activities:

           

Borrowings

     —          —          12       —           12  

Repayment of borrowings

     —          —          (29     —           (29

Dividends paid

     —          (199     (46     —           (245

Purchase of subsidiary shares from noncontrolling interests

     —          —          (104     —           (104

Sale of subsidiary shares to noncontrolling interests

     —          —          50       —           50  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     —          (199     (117     —           (316
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (4,879     4,274       186       —           (419

Cash and cash equivalents, beginning of period

     5,331       —          3,378       —           8,709  

Exchange movement on opening cash balance

     —          —          166       —           166  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 452     $ 4,274     $ 3,730     $ —         $ 8,456  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See notes to supplemental guarantor information

 

44


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.

 

45


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, 2011 as filed with the SEC on August 15, 2011 (the “2011 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 2012 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 six months ended December 31, 2011 and 2010. 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 six months ended December 31, 2011 and 2010. 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.

 

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Table of Contents
   

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.

 

   

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 146 newspapers in Australia, the publication of a metropolitan newspaper and a national newspaper (with international editions) in the United States and the provision of information services. 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 Wireless Generation, the Company’s education technology business.

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, independent television stations, cable and DBS 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 country.

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 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”), the FX Network (“FX”), Regional Sports Networks (“RSNs”), the National Geographic Channels, SPEED and

 

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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 television 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 a cable operator or direct broadcast satellite operator to facilitate the launch of a cable network). The Company defers the cable distribution investments and amortizes the amounts on a straight-line basis over the contract period. Cable television and 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.

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 2014 and a contract with Major League Baseball (“MLB”) through calendar year 2013. These contracts provide the Company with the broadcast rights to certain U.S. national sporting events during their respective terms. The costs of these sports contracts are charged to expense based on the ratio of each 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 December 31, 2011 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 December 31, 2011, 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.

 

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Filmed Entertainment

The Filmed Entertainment segment derives revenue from the production and distribution of feature motion pictures and television series. In general, motion pictures produced or acquired for distribution by the Company are exhibited in U.S. and foreign theaters, followed by home entertainment, 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