10-Q 1 fox-10q_20140331.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2014

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

 

TWENTY-FIRST CENTURY FOX, INC.

(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 May 2, 2014, 1,427,837,712 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.

 

 

 

 

 

 


 

TWENTY-FIRST CENTURY FOX, INC.

FORM 10-Q

TABLE OF CONTENTS

 

     

Page

Part I. Financial Information  

 

    Item 1.

 

Financial Statements

   

 

Unaudited Consolidated Statements of Operations for the three and nine months ended March 31, 2014 and 2013

3

   

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2014 and 2013

4

   

 

Consolidated Balance Sheets at March 31, 2014 (unaudited) and June 30, 2013 (audited)

5

   

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 and 2013

6

   

 

Notes to the Unaudited Consolidated Financial Statements

7

    Item 2.

 

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

40

    Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

55

    Item 4.

 

Controls and Procedures

57

Part II. Other Information

 

    Item 1.

 

Legal Proceedings

58

    Item 1A.

 

Risk Factors

59

    Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

65

    Item 3.

 

Defaults Upon Senior Securities

65

    Item 4.

 

Mine Safety Disclosures

65

    Item 5.

 

Other Information

65

    Item 6.

 

Exhibits

66

Signature

67

 

 

 

2


 

TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

 

 

For the three months ended

March 31,

 

 

For the nine months ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues

$

8,219

 

 

$

7,353

 

 

$

23,443

 

 

$

20,463

 

Operating expenses

 

(5,475

)

 

 

(4,826

)

 

 

(15,473

)

 

 

(12,859

)

Selling, general and administrative

 

(978

)

 

 

(980

)

 

 

(3,082

)

 

 

(2,898

)

Depreciation and amortization

 

(267

)

 

 

(214

)

 

 

(840

)

 

 

(569

)

Impairment charges

 

-

 

 

 

-

 

 

 

-

 

 

 

(35

)

Equity earnings of affiliates

 

170

 

 

 

132

 

 

 

430

 

 

 

432

 

Interest expense, net

 

(284

)

 

 

(277

)

 

 

(830

)

 

 

(802

)

Interest income

 

6

 

 

 

8

 

 

 

21

 

 

 

39

 

Other, net

 

(33

)

 

 

2,109

 

 

 

123

 

 

 

3,672

 

Income from continuing operations before income tax expense

 

1,358

 

 

 

3,305

 

 

 

3,792

 

 

 

7,443

 

Income tax expense

 

(269

)

 

 

(728

)

 

 

(929

)

 

 

(1,437

)

Income from continuing operations

 

1,089

 

 

 

2,577

 

 

 

2,863

 

 

 

6,006

 

(Loss) income from discontinued operations, net of tax

 

(16

)

 

 

321

 

 

 

696

 

 

 

1,625

 

Net income

 

1,073

 

 

 

2,898

 

 

 

3,559

 

 

 

7,631

 

Less: Net income attributable to noncontrolling interests

 

(20

)

 

 

(44

)

 

 

(44

)

 

 

(163

)

Net income attributable to Twenty-First Century Fox, Inc.

  stockholders

$

1,053

 

 

$

2,854

 

 

$

3,515

 

 

$

7,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to Twenty-First

  Century Fox, Inc. stockholders

$

1,069

 

 

$

2,533

 

 

$

2,819

 

 

$

5,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

2,252

 

 

 

2,324

 

 

 

2,279

 

 

 

2,344

 

Diluted

 

2,256

 

 

 

2,330

 

 

 

2,283

 

 

 

2,348

 

Income from continuing operations attributable to Twenty-First

  Century Fox, Inc. stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.47

 

 

$

1.09

 

 

$

1.24

 

 

$

2.49

 

Diluted

$

0.47

 

 

$

1.09

 

 

$

1.23

 

 

$

2.49

 

Net income attributable to Twenty-First Century Fox, Inc.

  stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.47

 

 

$

1.23

 

 

$

1.54

 

 

$

3.19

 

Diluted

$

0.47

 

 

$

1.22

 

 

$

1.54

 

 

$

3.18

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

3


 

TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(IN MILLIONS)

 

 

For the three months ended

March 31,

 

 

For the nine months ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income

$

1,073

 

 

$

2,898

 

 

$

3,559

 

 

$

7,631

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

21

 

 

 

(433

)

 

 

588

 

 

 

(152

)

Unrealized holding gains (losses) on securities

 

5

 

 

 

(27

)

 

 

(134

)

 

 

(25

)

Benefit plan adjustments

 

10

 

 

 

13

 

 

 

23

 

 

 

41

 

Other comprehensive income (loss), net of tax

 

36

 

 

 

(447

)

 

 

477

 

 

 

(136

)

Comprehensive income

 

1,109

 

 

 

2,451

 

 

 

4,036

 

 

 

7,495

 

Less: Net income attributable to noncontrolling interests(a)

 

(20

)

 

 

(44

)

 

 

(44

)

 

 

(163

)

Less: Other comprehensive income attributable to

  noncontrolling interests

 

(4

)

 

 

-

 

 

 

(134

)

 

 

(2

)

Comprehensive income attributable to Twenty-First Century Fox,

  Inc. stockholders

$

1,085

 

 

$

2,407

 

 

$

3,858

 

 

$

7,330

 

(a) 

Net income attributable to noncontrolling interests includes $26 million for the three months ended March 31, 2014 and 2013 and $74 million for the nine months ended March 31, 2014 and 2013 relating to redeemable noncontrolling interests.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

4


 

TWENTY-FIRST CENTURY FOX, INC.

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

 

As of March 31,

2014

 

 

As of June 30,

2013

 

 

(unaudited)

 

 

(audited)

 

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,517

 

 

$

6,659

 

Receivables, net

 

6,314

 

 

 

5,459

 

Inventories, net

 

3,387

 

 

 

2,784

 

Other

 

431

 

 

 

665

 

Total current assets

 

15,649

 

 

 

15,567

 

Non-current assets:

 

 

 

 

 

 

 

Receivables

 

456

 

 

 

437

 

Investments

 

2,908

 

 

 

3,704

 

Inventories, net

 

6,541

 

 

 

5,371

 

Property, plant and equipment, net

 

2,942

 

 

 

2,829

 

Intangible assets, net

 

8,294

 

 

 

5,064

 

Goodwill

 

17,918

 

 

 

17,255

 

Other non-current assets

 

585

 

 

 

717

 

Total assets

$

55,293

 

 

$

50,944

 

Liabilities and Equity:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Borrowings

$

797

 

 

$

137

 

Accounts payable, accrued expenses and other current liabilities

 

4,434

 

 

 

4,434

 

Participations, residuals and royalties payable

 

1,881

 

 

 

1,663

 

Program rights payable

 

1,921

 

 

 

1,524

 

Deferred revenue

 

682

 

 

 

677

 

Total current liabilities

 

9,715

 

 

 

8,435

 

Non-current liabilities:

 

 

 

 

 

 

 

Borrowings

 

18,257

 

 

 

16,321

 

Other liabilities

 

3,100

 

 

 

3,264

 

Deferred income taxes

 

2,723

 

 

 

2,280

 

Redeemable noncontrolling interests

 

534

 

 

 

519

 

Commitments and contingencies

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Class A common stock(a)

 

14

 

 

 

15

 

Class B common stock(b)

 

8

 

 

 

8

 

Additional paid-in capital

 

15,200

 

 

 

15,840

 

Retained earnings and accumulated other comprehensive income

 

2,241

 

 

 

1,135

 

Total Twenty-First Century Fox, Inc. stockholders' equity

 

17,463

 

 

 

16,998

 

Noncontrolling interests

 

3,501

 

 

 

3,127

 

Total equity

 

20,964

 

 

 

20,125

 

Total liabilities and equity

$

55,293

 

 

$

50,944

 

(a) 

Class A common stock, $0.01 par value per share, 6,000,000,000 shares authorized, 1,438,450,783 shares and 1,517,670,765 shares issued and outstanding, net of 123,687,371 treasury shares at par, at March 31, 2014 and June 30, 2013, respectively.

(b) 

Class B common stock, $0.01 par value per share, 3,000,000,000 shares authorized, 798,520,953 shares issued and outstanding, net of 356,993,807 treasury shares at par, at March 31, 2014 and June 30, 2013.

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

5


 

TWENTY-FIRST CENTURY FOX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

 

 

For the nine months ended

March 31,

 

 

2014

 

 

2013

 

Operating activities:

 

 

 

 

 

 

 

Net income

$

3,559

 

 

$

7,631

 

Less: Income from discontinued operations, net of tax

 

696

 

 

 

1,625

 

Income from continuing operations:

 

2,863

 

 

 

6,006

 

Adjustments to reconcile income from continuing operations to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

840

 

 

 

569

 

Amortization of cable distribution investments

 

61

 

 

 

67

 

Equity earnings of affiliates

 

(430

)

 

 

(432

)

Cash distributions received from affiliates

 

223

 

 

 

192

 

Impairment charges

 

-

 

 

 

35

 

Other, net

 

(123

)

 

 

(3,672

)

Change in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Receivables and other assets

 

(680

)

 

 

(233

)

Inventories, net

 

(1,457

)

 

 

(964

)

Accounts payable and other liabilities

 

284

 

 

 

817

 

Net cash provided by operating activities from continuing operations

 

1,581

 

 

 

2,385

 

Investing activities:

 

 

 

 

 

 

 

Property, plant and equipment

 

(470

)

 

 

(400

)

Acquisitions, net of cash acquired

 

(692

)

 

 

(589

)

Investments in equity affiliates

 

(72

)

 

 

(615

)

Other investments

 

(33

)

 

 

(57

)

Proceeds from dispositions

 

259

 

 

 

1,968

 

Net cash (used in) provided by investing activities from continuing operations

 

(1,008

)

 

 

307

 

Financing activities:

 

 

 

 

 

 

 

Borrowings

 

987

 

 

 

1,277

 

Repayment of borrowings

 

(142

)

 

 

(754

)

Issuance of shares

 

66

 

 

 

170

 

Repurchase of shares

 

(2,752

)

 

 

(1,834

)

Dividends paid

 

(444

)

 

 

(364

)

Purchase of subsidiary shares from noncontrolling interests

 

(76

)

 

 

-

 

Sale of subsidiary shares to noncontrolling interests

 

-

 

 

 

70

 

Distribution to News Corporation

 

(10

)

 

 

-

 

Net cash used in financing activities from continuing operations

 

(2,371

)

 

 

(1,435

)

Net increase (decrease) in cash and cash equivalents from discontinued operations

 

608

 

 

 

(1,577

)

Net decrease in cash and cash equivalents

 

(1,190

)

 

 

(320

)

Cash and cash equivalents, beginning of year

 

6,659

 

 

 

9,626

 

Exchange movement on opening cash balance

 

48

 

 

 

18

 

Cash and cash equivalents, end of period

$

5,517

 

 

$

9,324

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

6


 

TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. BASIS OF PRESENTATION

Twenty-First Century Fox, Inc. (formerly known as News Corporation) and its subsidiaries (together, “Twenty-First Century Fox” or the “Company”) is a Delaware corporation. Twenty-First Century Fox is a diversified global media and entertainment company, which manages and reports its businesses in five segments: Cable Network Programming, Television, Filmed Entertainment, Direct Broadcast Satellite Television and Other, Corporate and Eliminations.

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, 2014.

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, 2013 as filed with the Securities and Exchange Commission (“SEC”) on August 19, 2013 (the “2013 Form 10-K”).

The consolidated financial statements include the accounts of Twenty-First Century Fox. Intercompany transactions and balances have been eliminated. 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 preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates.

On September 19, 2013, the Company changed its fiscal year from a 52-53 week fiscal year ending on the Sunday closest to June 30 to a fiscal year ending on June 30 of each year. The Company’s 2013 fiscal year ended on June 30, 2013. The Company made this change to better align its financial reporting with the media and entertainment assets retained following the separation of its business into two independent publicly traded companies (the “Separation”) by distributing to its stockholders all of the outstanding shares of the new News Corporation (“News Corp”) on June 28, 2013. (See Note 4 – Discontinued Operations)

Certain fiscal 2013 amounts have been reclassified to conform to the fiscal 2014 presentation. As a result of the Separation, News Corp has been classified as discontinued operations for all periods presented (See Note 4 – Discontinued Operations). Unless indicated otherwise, the information in the notes to the unaudited consolidated financial statements relate to the Company’s continuing operations.

Recently Adopted and Recently Issued Accounting Guidance

Adopted

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, it requires the Company to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, the Company is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 became effective for the Company for interim reporting periods beginning July 1, 2013. The adoption of ASU 2013-02 resulted in the disclosure of additional information within the notes to the consolidated financial statements. (See Note 12 – Stockholders’ Equity)

Issued

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” (“ASU 2013-05”). The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets or a business within a foreign entity. ASU 2013-05 is effective for the Company for interim reporting periods beginning July 1, 2014, however, early adoption is permitted. The Company is currently evaluating the impact ASU 2013-05 will have on its consolidated financial statements.

7


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)” (“ASU 2014-08”). The amendments in ASU 2014-08 provide guidance for the recognition of discontinued operations, change the requirements for reporting discontinued operations in ASC 205-20, “Discontinued Operations” (“ASC 205-20”) and require additional disclosures about discontinued operations. ASU 2014-08 is effective for the Company for interim reporting periods beginning July 1, 2015, however, early adoption is permitted. The Company is currently evaluating the impact ASU 2014-08 will have on its consolidated financial statements.

 

NOTE 2. VARIABLE INTEREST ENTITIES

The Company evaluates whether a Twenty-First Century Fox entity or interest is a variable interest entity (“VIE”) and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met.

The Company owns an approximate 33% interest in Hulu LLC (“Hulu”). In October 2012, Hulu redeemed Providence Equity Partners’ equity interest for $200 million. In connection with the transaction, Hulu incurred a charge primarily related to employee equity-based compensation. Accordingly, the Company recorded approximately $60 million to reflect its share of the charge in the second quarter of fiscal 2013. The Company has guaranteed $115 million of Hulu’s $338 million five-year term loan which was used by Hulu, in part, to finance the transaction. The fair value of this guarantee was calculated using Level 3 inputs and was included in the consolidated balance sheets in Other liabilities. In July 2013, the Company invested an additional $125 million in Hulu and has committed to invest an additional $125 million in Hulu to maintain its ownership percentage of approximately 33%.

Hulu is considered a VIE. However, the Company is not the primary beneficiary. The Company’s risk of loss related to this investment is $115 million, the portion of Hulu’s debt that it guarantees. The Company will continue to account for its interest in Hulu as an equity method investment.

 

NOTE 3. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS

During the nine months ended March 31, 2014 and fiscal year ended June 30, 2013, the Company completed a number of acquisitions as more fully described below. All of the Company’s acquisitions were accounted for under Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”), which requires, among other things, that an acquirer (i) remeasure any previously held equity interest in an acquiree at its acquisition date fair value and recognize any resulting gains or losses in earnings and (ii) record any non-controlling interests in an acquiree at their acquisition date fair values. Accordingly, several of the transactions described below resulted in the recognition of remeasurement gains since the Company acquired control of an acquiree in stages. Further, other transactions described below involved the Company acquiring control with an ownership stake of less than 100%. In those instances, the allocation of the excess purchase price reflects 100% of the fair value of the acquiree with the non-controlling interests recorded at fair value.

The below acquisitions all support the Company’s strategic priority of increasing its brand presence and reach in key international and domestic markets, acquiring greater control of investments that complement its portfolio of businesses and creating new pay-TV sports franchises. For those acquisitions where the accounting for the business combination is based on provisional amounts and the allocation of the excess purchase price is not final, the amounts allocated to intangibles and goodwill, the estimates of useful lives and the related amortization expense are subject to change pending the completion of final valuations of certain assets and liabilities. A change in the purchase price allocations and any estimates of useful lives could result in a change in the value allocated to the intangible assets that could impact amortization expense.

Fiscal 2014

Acquisitions

Latin America Pay Television

In September 2013, the Company acquired the 22% interest it did not already own in Latin America Pay Television (“LAPTV”), an entity that distributes premium and basic television channels in Latin America, for approximately $75 million in cash. As a result of this transaction, the Company now owns 100% of LAPTV. The transaction is accounted for as the purchase of subsidiary shares from noncontrolling interests.

8


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Plazamedia

In December 2013, Sky Deutschland AG (“Sky Deutschland”), a majority-owned consolidated subsidiary of the Company, agreed to acquire from Constantin Medien AG, a 100% interest in the production company PLAZAMEDIA TV and Film Produktion GmbH (“Plazamedia”) as well as a 25.1% equity stake in Sport1 GmbH and Constantin Sport Marketing GmbH for €57.5 million (approximately $80 million), net of cash acquired. Plazamedia is an established full-service provider for television and new media as well as one of the leading producers of sports television in the German-speaking markets. This transaction will be financed under Sky Deutschland’s credit agreement, as amended.  (See Note 10 – Borrowings)

Yankees Entertainment and Sports Network

In December 2012, the Company acquired a 49% equity interest in the Yankees Entertainment and Sports Network (“YES Network”), a Regional Sports Network (“RSN”) primarily broadcasting pre-season and regular season games for the New York Yankees and the Brooklyn Nets, for $584 million. Simultaneous with the closing of this transaction, the Company also paid approximately $250 million of upfront programming costs on behalf of the YES Network.  The Company accounted for its investment in the YES Network under the equity method of accounting.  The Company’s total investment of $834 million was allocated between tangible and intangible assets in accordance with ASC 323, “Investments – Equity Investments.”

On February 28, 2014, the Company acquired an additional 31% interest in the YES Network, increasing the Company’s ownership interest to 80%, for approximately $680 million, net of cash acquired, and subsequent to the acquisition, the Company has consolidated the balance sheet and operating results of the YES Network, including $1.7 billion in debt.  The remaining 20% of the YES Network not owned by the Company has been recorded at fair value of approximately $385 million based on the Company’s provisional valuation of the YES Network business using a market approach (a Level 3 measurement as defined in Note 8 – Fair Value).  The carrying amount of the Company’s previously held equity interest in the YES Network was revalued to its provisional fair value of approximately $860 million as of the acquisition date.  The aggregate excess purchase price has been preliminarily allocated, based on a provisional valuation of 100% of the YES Network, as follows: approximately $1.9 billion to intangible assets consisting of Multiple-System Operator (“MSO”) agreements with useful lives of 20 years and advertiser relationships with useful lives of 6 years, and the indefinite-lived YES Network trade name; approximately $1.7 billion to debt; approximately $1.5 billion representing the goodwill on the transaction; and other net assets. The goodwill reflects the synergies and increased market penetration expected from combining the operations of the YES Network and the Company.  Subsequent to the acquisition, the Company paid approximately $160 million of upfront programming costs on behalf of the YES Network.

Fiscal 2013

Acquisitions

Eredivisie Media & Marketing

In November 2012, the Company acquired a controlling 51% ownership stake in Eredivisie Media & Marketing CV (“EMM”) for approximately $350 million, of which $325 million was cash and $25 million was contingent consideration. EMM is a media company that holds the collective media and sponsorship rights of the Dutch Premier League. The remaining 49% of EMM, which is owned by the Dutch Premier League and the global TV production company Endemol, has been recorded at its acquisition date fair value. The excess purchase price, based on a valuation of 100% of EMM, of approximately $670 million has been allocated as follows: $325 million to amortizable intangible assets, primarily customer relationships, with useful lives ranging from 6 to 20 years, and approximately $345 million representing the goodwill on the transaction. The goodwill reflects the synergies and increased market penetration expected from combining the operations of EMM and the Company.

Fox Sports Asia (formerly ESPN Star Sports)

In November 2012, the Company acquired the remaining 50% interest in ESPN Star Sports, now operating as Fox Sports Asia, that it did not already own for approximately $220 million, net of cash acquired. Fox Sports Asia is a leading sports broadcaster in Asia and the Company now, through its wholly owned subsidiaries, owns 100% of Fox Sports Asia. The carrying amount of the Company’s previously held equity interest in Fox Sports Asia was revalued to fair value as of the acquisition date, resulting in a non-taxable gain of $174 million which was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2013. The aggregate excess purchase price of $1,030 million, including the revalued previously held investment of $280 million and contract-related liabilities of approximately $450 million, has been allocated as follows: $190 million to amortizable intangible assets, primarily MSO agreements, with useful lives ranging from 8 to 15 years, and approximately $840 million representing the goodwill on the transaction.  The goodwill reflects the synergies and increased market penetration expected from combining the operations of Fox Sports Asia and the Company.

9


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

SportsTime Ohio

In December 2012, the Company acquired SportsTime Ohio, a RSN serving the Cleveland, Ohio market, for an estimated total purchase price, including post-closing costs, of approximately $285 million, of which $135 million was in cash. The balance of the purchase price represents the fair value of deferred payments and payments that are contingent upon achievement of certain performance objectives. The excess purchase price of approximately $275 million has been allocated as follows: $135 million to amortizable intangible assets, primarily MSO agreements, with useful lives ranging from 8 to 20 years, and approximately $140 million representing the goodwill on the transaction. The goodwill reflects the synergies and increased market penetration expected from combining the operations of the RSN and the Company.

Sky Deutschland

During the third quarter of fiscal 2013, the Company acquired, through a combination of a private placement and a rights offering, approximately 92 million additional shares of Sky Deutschland increasing the Company’s ownership interest to 55%. The remaining 45% of Sky Deutschland not owned by the Company has been recorded at fair value of approximately $2.3 billion, based on the closing price of its shares on the Frankfurt Stock Exchange on the date control was acquired (a Level 1 measurement as defined in Note 8 – Fair Value). The aggregate cost of shares acquired by the Company was approximately €410 million (approximately $550 million). The carrying amount of the Company’s previously held equity interest in Sky Deutschland was revalued to fair value as of the acquisition date, resulting in a gain of approximately $2.1 billion which was included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2013. The aggregate excess purchase price has been allocated as follows: approximately $1.7 billion to intangible assets, primarily consisting of subscriber relationships, with a useful life of 11 years, and the indefinite-lived Sky trade name, approximately $4.3 billion representing the goodwill on the transaction and the related deferred tax liabilities. As of result of these transactions, the Company has the power to control Sky Deutschland and the results of Sky Deutschland were included in the Company’s consolidated results of operations beginning in January 2013. Prior to the acquisition of the additional 5% ownership interest, the Company accounted for its investment in Sky Deutschland under the equity method of accounting and the Company’s investment consisted of common stock, convertible bonds and loans.

The Company has guaranteed Sky Deutschland’s €300 million (approximately $415 million) five-year bank credit facility, of which €225 million (approximately $310 million) has been utilized and is included in Borrowings. In connection with the consolidation of Sky Deutschland, the Company assumed approximately $480 million in bank debt, which Sky Deutschland repaid in full during the third quarter of fiscal 2013. Additionally, the Company is the guarantor to the German Football League for Sky Deutschland’s Bundesliga broadcasting license for the 2013-2014 to 2016-2017 seasons in an amount up to 50% of the license fee per season and the Company has also agreed to extend the maturity of existing shareholder loans that were issued before it became a consolidated subsidiary.

In January 2011, the Company purchased a convertible bond from Sky Deutschland for approximately $225 million. The Company currently has the right to convert the bonds into 53.9 million underlying Sky Deutschland shares, subject to certain black-out periods. If not converted, the Company will redeem the bonds for cash upon their maturity in January 2015. The convertible bonds were separated into their host and derivative financial instrument components. Prior to Sky Deutschland becoming a consolidated subsidiary, both the host and derivative financial instrument components were recorded at their estimated fair value in Investments in the consolidated balance sheets. The change in estimated fair value of the derivative instrument resulted in a gain of $58 million which was recorded in Other, net in the Company’s unaudited consolidated statements of operations for the nine months ended March 31, 2013. Subsequent to becoming a consolidated subsidiary, the convertible loan was effectively settled as a pre-existing relationship under the provisions of ASC 805-10-25-21 with the carrying amount of the asset for the derivative component written off as a settlement loss which was included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2013.

Other

In May 2012, the Company renewed its existing FOX affiliation agreement with a major FOX affiliate group (“Network Affiliate”). As part of the transaction, the Company received cash consideration of $50 million and the Network Affiliate had an option to buy the Company’s Baltimore station. Network Affiliate exercised its option to purchase the Baltimore television station and the Company recognized a loss on the transaction, of which $92 million was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2013. The Company is amortizing the $50 million received from the Network Affiliate over the term of the affiliation agreement.

 

10


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4. DISCONTINUED OPERATIONS

Separation of News Corp

On June 28, 2013, the Company completed the Separation of its business into two independent publicly traded companies by distributing to its stockholders all of the outstanding shares of News Corp. The Company retained its interests in a global portfolio of media and entertainment assets spanning six continents. News Corp holds the Company’s former businesses including newspapers, information services and integrated marketing services, digital real estate services, book publishing, digital education and sports programming and pay-TV distribution in Australia. The Company completed the Separation by distributing to its stockholders one share of News Corp Class A common stock for every four shares of the Company’s Class A common stock held on June 21, 2013, and one share of News Corp Class B common stock for every four shares of the Company’s Class B common stock held on June 21, 2013. The Company’s stockholders received cash in lieu of fractional shares. Following the Separation, the Company does not beneficially own any shares of News Corp Class A common stock or News Corp Class B common stock.

Effective June 28, 2013, the Separation qualified for discontinued operations treatment in accordance with ASC 205-20, and accordingly the Company deconsolidated News Corp’s balance sheet as of June 30, 2013, and presented its results for the three and nine months ended March 31, 2013 as discontinued operations on the unaudited consolidated statements of operations and as discontinued operations on the unaudited consolidated statements of cash flows for the nine months ended March 31, 2013. The footnotes to the financial statements have also been revised accordingly.

The Company entered into a separation and distribution agreement with News Corp (“Separation and Distribution Agreement”) pursuant to which the Company agreed to provide a cash contribution to News Corp immediately prior to the Separation, so that as of the Separation, News Corp would have approximately $2.6 billion of cash on hand. Accordingly, immediately prior to the Separation, the Company distributed approximately $2.4 billion to News Corp, which was comprised of $1.6 billion in cash funding and approximately $800 million that was held by News Corp’s subsidiaries immediately prior to the Separation. The Company made a final cash distribution of $217 million in September 2013, pursuant to the Separation and Distribution Agreement.

Separation and Distribution Agreement

The Separation and Distribution Agreement sets forth, among other things, the parties’ agreements regarding the principal transactions necessary to effect the Separation.

The Separation and Distribution Agreement provides for the transfers of entities and their related assets and liabilities so that as of the Separation, the Company and News Corp each consists of the entities associated with the businesses described above. The Separation and Distribution Agreement also provides that the Company will indemnify News Corp, on an after-tax basis, for payments made after the Separation arising out of civil claims and investigations relating to the U.K. Newspaper Matters (as defined below), as well as legal and professional fees and expenses paid in connection with the related criminal matters, other than fees, expenses and costs relating to employees who are not (i) directors, officers or certain designated employees or (ii) with respect to civil matters, co-defendants with News Corp. U.K. Newspaper Matters refers to ongoing investigations by U.K. and U.S. regulators and governmental authorities relating to phone hacking, illegal data access and inappropriate payments to public officials at The News of the World and The Sun and related matters. In addition, the Separation and Distribution Agreement governs the Company’s and News Corp’s agreements with regard to each party’s ability to comply with certain statutes or rules and regulations promulgated by the Federal Communications Commission. (See Note 14 – Commitments and Contingencies)

Tax Sharing and Indemnification Agreement

The Company entered into a tax sharing and indemnification agreement with News Corp that governs the Company’s and News Corp’s respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. Under the tax sharing and indemnification agreement, News Corp will generally indemnify the Company against taxes attributable to News Corp’s assets or operations for all tax periods or portions thereof after the Separation. For taxable periods or portions thereof prior to the Separation, the Company will generally indemnify News Corp against U.S. consolidated and combined taxes attributable to such periods, and News Corp will indemnify the Company against News Corp’s separately filed U.S. state and foreign taxes and foreign consolidated and combined taxes for such periods. The tax sharing and indemnification agreement also provides that the proceeds, if any, from the refunds of certain foreign taxes (plus interest) of a subsidiary of News Corp that were claimed prior to the Separation are to be paid to the Company, net of certain taxes.

A subsidiary of News Corp, prior to the Separation, had filed refunds to claim certain losses in a foreign jurisdiction. At June 30, 2013, News Corp did not recognize an asset for the claims since such amounts were being disputed by the foreign tax authority and the resolution was not determinable at that time. During the nine months ended March 31, 2014, the foreign jurisdiction notified News Corp that it had accepted its claims and would refund the taxes plus interest to News Corp. As of March 31, 2014, the net amount that the Company has received, pursuant to the tax sharing and indemnification agreement with News Corp, is approximately $720 million, which has been included in (Loss) income from discontinued operations, net of tax, in the unaudited consolidated statement of operations.

11


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Employee Matters Agreement

The Company entered into an employee matters agreement that governs the Company’s and News Corp’s obligations with respect to employment, compensation, benefits and other related matters for employees of certain of News Corp’s U.S.-based businesses (the “Employee Matters Agreement”). In general, the Employee Matters Agreement addresses matters relating to employees transferring to News Corp’s U.S. businesses and former News Corp employees of those businesses that participated in the Company’s retirement plans (including postretirement benefits) and welfare programs, which were retained by the Company following the distribution. The Employee Matters Agreement also addresses equity compensation matters relating to employees of both companies.

Summarized Financial Information

Revenues and (Loss) income from discontinued operations related to News Corp were as follows:

 

 

For the three months ended

March 31,

 

 

For the nine months ended

March 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(in millions, except per share data)

 

Revenues

$

-

 

 

$

2,185

 

 

$

-

 

 

$

6,636

 

(Loss) income before income tax (expense) benefit(a)

$

(16

)

 

$

363

 

 

$

696

 

 

$

1,668

 

Income tax (expense) benefit

$

-

 

 

$

(13

)

 

$

-

 

 

$

35

 

(Loss) income from discontinued operations, net of tax

$

(16

)

 

$

321

 

 

$

696

 

 

$

1,625

 

Basic EPS from discontinued operations

$

(0.01

)

 

$

0.14

 

 

$

0.31

 

 

$

0.69

 

Diluted EPS from discontinued operations

$

(0.01

)

 

$

0.14

 

 

$

0.30

 

 

$

0.69

 

(a) 

Includes the net tax refund from News Corp, as stated above, for the nine months ended March 31, 2014 of approximately $720 million.

Cash flows from discontinued operations related to News Corp were as follows:

 

 

For the nine months ended

March 31,

 

 

2014

 

 

2013

 

 

(in millions)

 

Net cash provided by operating activities from discontinued operations

$

608

 

 

$

379

 

Net cash used in investing activities from discontinued operations

 

-

 

 

 

(1,692

)

Net cash used in financing activities from discontinued operations

 

-

 

 

 

(264

)

Net increase (decrease) in cash and cash equivalents from discontinued operations

$

608

 

 

$

(1,577

)

 

 

NOTE 5. RECEIVABLES, NET

Receivables are presented net of an allowance for returns and doubtful accounts, which is an estimate of amounts that may not be collectible. In determining the allowance for returns, management analyzes historical returns, current economic trends and changes in customer demand and acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of product sales that provide the customer with the right of return. The allowance for doubtful accounts is estimated based on historical experience, receivable aging, current economic trends and specific identification of certain receivables that are at risk of not being paid.

The Company has receivables with original maturities greater than one year in duration principally related to the Company’s sale of program rights in the television syndication markets within the Filmed Entertainment segment. Allowances for credit losses are established against these non-current receivables as necessary. As of March 31, 2014 and June 30, 2013, these allowances were not material.

12


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Receivables, net consisted of:

 

 

As of

March 31,

2014

 

 

As of

June 30,

2013

 

 

(in millions)

 

Total receivables

$

7,810

 

 

$

6,795

 

Allowances for returns and doubtful accounts

 

(1,040

)

 

 

(899

)

Total receivables, net

 

6,770

 

 

 

5,896

 

Less: current receivables, net

 

(6,314

)

 

 

(5,459

)

Non-current receivables, net

$

456

 

 

$

437

 

 

 

NOTE 6. INVENTORIES

The Company’s inventories were comprised of the following:

 

 

As of

March 31,

2014

 

 

As of

June 30,

2013

 

 

(in millions)

 

Programming rights

$

6,052

 

 

$

4,996

 

DVDs, Blu-rays, and other merchandise

 

82

 

 

 

69

 

Filmed entertainment costs:

 

 

 

 

 

 

 

Films:

 

 

 

 

 

 

 

Released

 

971

 

 

 

806

 

Completed, not released

 

112

 

 

 

10

 

In production

 

1,129

 

 

 

958

 

In development or preproduction

 

205

 

 

 

193

 

 

 

2,417

 

 

 

1,967

 

Television productions:

 

 

 

 

 

 

 

Released

 

764

 

 

 

696

 

In production

 

610

 

 

 

425

 

In development or preproduction

 

3

 

 

 

2

 

 

 

1,377

 

 

 

1,123

 

Total filmed entertainment costs, less accumulated amortization(a)

 

3,794

 

 

 

3,090

 

Total inventories, net

 

9,928

 

 

 

8,155

 

Less: current portion of inventories, net(b)

 

(3,387

)

 

 

(2,784

)

Total non-current inventories, net

$

6,541

 

 

$

5,371

 

(a) 

Does not include $343 million and $366 million of net intangible film library costs as of March 31, 2014 and June 30, 2013, respectively, which are included in intangible assets subject to amortization in the consolidated balance sheets.

(b) 

Current portion of inventories as of March 31, 2014 and June 30, 2013 was comprised of programming rights ($3,305 million and $2,715 million, respectively), DVDs, Blu-rays, and other merchandise.

 

13


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7. INVESTMENTS

The Company’s investments were comprised of the following:

 

 

 

 

Ownership

percentage

As of

March 31,

2014

 

 

As of

March 31,

2014

 

 

As of

June 30,

2013

 

 

 

 

 

 

 

 

(in millions)

 

Equity method investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

British Sky Broadcasting Group plc(a)

 

U.K. DBS operator

 

39%

 

 

$

2,311

 

 

$

1,978

 

Yankees Entertainment and Sports Network(b)

 

Regional sports network

 

80%

 

 

 

-

 

 

 

825

 

Other equity method investments

 

 

various

 

 

 

368

 

 

 

386

 

Fair value of available-for-sale investments

 

 

various

 

 

 

47

 

 

 

268

 

Other investments

 

 

various

 

 

 

182

 

 

 

247

 

Total investments

 

 

 

 

 

 

$

2,908

 

 

$

3,704

 

(a)

The Company’s investment in British Sky Broadcasting Group plc (“BSkyB”) had a market value of $9,364 million at March 31, 2014 and was valued using the quoted market price on the London Stock Exchange (a Level 1 measurement as described in Note 8 – Fair Value).

(b)

See Note 3 – Acquisitions, Disposals and Other Transactions.

BSkyB

BSkyB’s shareholders and board of directors have 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 considerations of $35 million and $14 million during the three months ended March 31, 2014 and 2013, respectively, and of $107 million and $272 million during the nine months ended March 31, 2014 and 2013, respectively.  The Company recognized gains of $28 million and $11 million during the three months ended March 31, 2014 and 2013, respectively, and of $84 million and $217 million during the nine months ended March 31, 2014 and 2013, respectively, which were included in Equity earnings of affiliates in the Company’s unaudited consolidated statements of operations.

NDS

In July 2012, the Company sold its 49% investment in NDS Group Limited (“NDS”) to Cisco Systems Inc. for approximately $1.9 billion, of which approximately $60 million was set aside in escrow to satisfy any indemnification obligations. The Company recorded a gain of approximately $1.4 billion on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2013.

During the third quarter of fiscal 2014, upon the resolution of the indemnification obligations, the escrow was released.  The Company received approximately $30 million of the amount set aside in escrow and has recorded a charge for the remaining amount. The charge is included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2014.

Other

In January 2014, the Company agreed to sell its 47% interest in CMC-News Asia Holdings Limited, which has a carrying value of approximately $80 million. The Company expects this transaction to close in the fourth quarter of fiscal 2014 and expects to record a gain on the sale.

In March 2013, the Company sold a portion of its interest in Phoenix Satellite Television Holdings Ltd. (“Phoenix”), for approximately $90 million in cash, decreasing its ownership interest to 12% from 18% at June 30, 2012. The Company recorded a gain of approximately $81 million on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the three and nine months ended March 31, 2013. In November 2013, the Company sold its remaining 12% interest in Phoenix for approximately $210 million. The Company recorded a gain of $199 million on this transaction which was included in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2014.

14


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Fair value of available-for-sale investments

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

 

 

As of

March 31,

2014

 

 

As of

June 30,

2013

 

 

(in millions)

 

Cost basis of available-for-sale investments

$

21

 

 

$

36

 

Accumulated gross unrealized gain(a)

 

26

 

 

 

232

 

Fair value of available-for-sale investments

$

47

 

 

$

268

 

Net deferred tax liability

$

9

 

 

$

81

 

(a)

Approximately $200 million of the unrealized gain as of June 30, 2013 relates to the Company’s investment in Phoenix which was sold in November 2013 and recognized in Other, net in the unaudited consolidated statements of operations for the nine months ended March 31, 2014.

 

NOTE 8. FAIR VALUE

In accordance with ASC 820, “Fair Value Measurement,” fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”); (ii) inputs other than quoted prices included within Level 1 that are observable, including quoted prices for similar assets or liabilities (“Level 2”); and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (“Level 3”). 

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

 

 

 

Fair value measurements

 

 

 

As of March 31, 2014

 

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(a)

 

$

47

 

 

$

47

 

 

$

-

 

 

$

-

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives(b)

 

 

(18

)

 

 

-

 

 

 

(18

)

 

 

-

 

Redeemable noncontrolling interests(c)

 

 

(534

)

 

 

-

 

 

 

-

 

 

 

(534

)

Total

 

$

(505

)

 

$

47

 

 

$

(18

)

 

$

(534

)

 

 

 

As of June 30, 2013

 

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(a)

 

$

268

 

 

$

268

 

 

$

-

 

 

$

-

 

Derivatives(b)

 

 

3

 

 

 

-

 

 

 

3

 

 

 

-

 

Redeemable noncontrolling interests(c)

 

 

(519

)

 

 

-

 

 

 

-

 

 

 

(519

)

Total

 

$

(248

)

 

$

268

 

 

$

3

 

 

$

(519

)

 

15


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(a) 

See Note 7 – Investments.

(b) 

Primarily represents derivatives associated with the Company’s foreign currency forward and interest rate swap contracts designated as cash flow hedges.

(c) 

The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A because their exercise is outside the control of the Company and, accordingly, as of March 31, 2014 and June 30, 2013, has included the fair value of the redeemable noncontrolling interests in the consolidated balance sheets. The redeemable noncontrolling interests recorded at fair value are put arrangements held by the noncontrolling interests in certain of the Company’s majority-owned sports networks.

The Company utilizes the market, income or cost approaches or a combination of these valuation techniques for its Level 3 fair value measures. Inputs to such measures could include observable market data obtained from independent sources such as broker quotes and recent market transactions for similar assets. It is the Company’s policy to maximize the use of observable inputs in the measurement of its Level 3 fair value measurements. To the extent observable inputs are not available, the Company utilizes unobservable inputs based upon the assumptions market participants would use in valuing the asset. Examples of utilized unobservable inputs are future cash flows, long term growth rates and applicable discount rates.

Significant unobservable inputs used in the fair value measurement of the Company’s redeemable noncontrolling interests are earnings before interest, taxes, depreciation and amortization (“OIBDA”) growth rates (3% - 7% range) and discount rates (8%). Significant increases (decreases) in growth rates and multiples, assuming no change in discount rates, would result in a significantly higher (lower) fair value measurement. Significant decreases (increases) in discount rates, assuming no changes in growth rates and multiples, would result in a significantly higher (lower) fair value measurement.

The fair value of the redeemable noncontrolling interests in two of the sports networks were primarily determined by (i) applying a multiples-based formula that is intended to approximate fair value for one of the sports networks and (ii) using a discounted OIBDA valuation model, assuming a 8% discount rate for another sports network. As of March 31, 2014, one of the minority shareholder’s put right is currently exercisable and another minority shareholder’s put right will become exercisable in March 2015.

The remaining redeemable noncontrolling interest is currently not exercisable and is not material.

The changes in redeemable noncontrolling interests classified as Level 3 measurements were as follows:

 

 

For the nine months ended

March 31,

 

 

2014

 

 

2013

 

 

(in millions)

 

Beginning of period

$

(519

)

 

$

(641

)

Net income attributable to redeemable noncontrolling interests

 

(74

)

 

 

(74

)

Distributions and other

 

59

 

 

 

70

 

End of period

$

(534

)

 

$

(645

)

 

 

Financial Instruments

The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables, payables and cost method investments, approximates fair value.

The aggregate fair value of the Company’s borrowings at March 31, 2014 was $22,109 million compared with a carrying value of $19,054 million and, at June 30, 2013, was $18,756 million compared with a carrying value of $16,458 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 (a Level 1 measurement).

16


TWENTY-FIRST CENTURY FOX, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Foreign Currency Forward Contracts

The Company uses financial instruments primarily to hedge certain exposures to foreign currency exchange risks associated with the cost of producing or acquiring films and television programming. 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 notional amount of foreign currency forward contracts designated as cash flow hedges with foreign currency risk outstanding at March 31, 2014 and June 30, 2013 were $410 million and $578 million, respectively. As of March 31, 2014, the fair value of the foreign currency forward contracts designated as cash flow hedges of $(10) million were recorded along with the underlying hedged balances. The notional amount of foreign currency forward contracts, not designated as cash flow hedges, but used as economic hedges with foreign currency risk outstanding at March 31, 2014 and June 30, 2013 were $318 million and $128 million, respectively. As of March 31, 2014, the fair value of the foreign currency forward contracts used as economic hedges of $(3) million were recorded along with the underlying hedged balances. For the three and nine months ended March 31, 2014, the changes in the fair values of foreign currency forward contracts that are not designated as cash flow hedges were not material. These changes were recorded in earnings each period and are presented net within Other in the table below.

Interest Rate Swap Contracts

The Company uses financial instruments to hedge certain exposures to interest rate risks associated with certain borrowings. The Company’s interest rate swap contracts are valued using an income approach. The notional amount of interest rate swap contracts outstanding at March 31, 2014 and June 30, 2013 were $584 million and nil.  As of March 31, 2014, approximately $310 million of the total notional amount of interest rate swap contracts outstanding were designated as cash flow hedges. The fair value of the interest rate swap contracts as of March 31, 2014 was approximately $(5) million and was recorded along with the underlying hedged balances. The changes in the fair values of the interest rate swap contracts for the three and nine months ended March 31, 2014 were not material. For designated cash flow hedges and economic hedges, these changes were recorded in each period in accumulated other comprehensive income and earnings, respectively, and are presented net in the table below.

The following table shows the changes in fair value of derivatives designated as cash flow hedges and other derivatives:

 

 

 

For the three months ended

March 31,

 

 

 

2014

 

 

2013

 

 

 

(in millions)

 

Beginning of period

 

$

(19

)

 

$

(3

)

Changes in fair value recorded in accumulated other comprehensive (loss) income, net of

    settlements

 

 

(5

)

 

 

6

 

Reclassified losses from accumulated other comprehensive income to net income

 

 

6

 

 

 

1

 

Other

 

 

-

 

 

 

(13

)

End of period

 

$

(18

)

 

$

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

March 31,

 

 

 

2014

 

 

2013

 

 

 

(in millions)

 

Beginning of period

 

$

3

 

 

$

17

 

Changes in fair value recorded in accumulated other comprehensive loss, net of settlements

 

 

(26

)

 

 

-

 

Reclassified losses (gains) from accumulated other comprehensive income to net income

 

 

10

 

 

 

(13

)

Other

 

 

(5

)

 

 

(13

)