ck0001754301-10q_20181231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2018

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 001-38776

 

FOX CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

83-1825597

(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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes       No  

As of March 18, 2019, none of the voting stock of the registrant was held by a non-affiliate of the registrant and there was no publicly traded market for any class of voting stock of the registrant. As of March 18, 2019, Twenty-First Century Fox, Inc. was the sole holder of record of the registrant’s equity and held one share of Class B Common Stock, par value $0.01 per share, of the registrant.

 


FOX CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

Part I. Financial Information

 

 

Item 1.

 

Financial Statements

 

 

 

Unaudited Combined Statements of Operations for the three and six months ended December 31, 2018 and 2017 

1

 

 

 

Unaudited Combined Statements of Comprehensive Income for the three and six months ended December 31, 2018 and 2017

2

 

 

 

Combined Balance Sheets as of December 31, 2018 (unaudited) and June 30, 2018 (audited)

3

 

 

 

Unaudited Combined Statements of Cash Flows for the six months ended December 31, 2018 and 2017

4

 

 

 

Notes to the Unaudited Combined Financial Statements

5

 

Item 2.

 

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

21

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

31

 

Item 4.

 

Controls and Procedures

31

Part II. Other Information

 

 

Item 1.

 

Legal Proceedings

32

 

Item 1A.

 

Risk Factors

33

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

Item 3.

 

Defaults Upon Senior Securities

34

 

Item 4.

 

Mine Safety Disclosures

34

 

Item 5.

 

Other Information

34

 

Item 6.

 

Exhibits

35

 

Signature

36

 

 


 

FOX CORPORATION

UNAUDITED COMBINED STATEMENTS OF OPERATIONS

(IN MILLIONS)

 

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

3,583

 

 

$

3,108

 

 

$

6,124

 

 

$

5,296

 

Operating expenses

 

 

(2,818

)

 

 

(2,346

)

 

 

(4,309

)

 

 

(3,610

)

Selling, general and administrative

 

 

(329

)

 

 

(309

)

 

 

(628

)

 

 

(572

)

Depreciation and amortization

 

 

(51

)

 

 

(42

)

 

 

(94

)

 

 

(83

)

Interest expense

 

 

(15

)

 

 

(6

)

 

 

(31

)

 

 

(13

)

Other, net

 

 

(339

)

 

 

(93

)

 

 

(200

)

 

 

(95

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax (expense) benefit

 

 

31

 

 

 

312

 

 

 

862

 

 

 

923

 

Income tax (expense) benefit

 

 

(7

)

 

 

570

 

 

 

(223

)

 

 

359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

24

 

 

 

882

 

 

 

639

 

 

 

1,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests

 

 

(16

)

 

 

(13

)

 

 

(27

)

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Fox Corporation

 

$

8

 

 

$

869

 

 

$

612

 

 

$

1,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Unaudited Combined Financial Statements.

1


 

FOX CORPORATION

UNAUDITED COMBINED STATEMENTS OF COMPREHENSIVE INCOME

(IN MILLIONS)

 

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

24

 

 

$

882

 

 

$

639

 

 

$

1,282

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on securities

 

 

-

 

 

 

96

 

 

 

-

 

 

 

177

 

Benefit plan adjustments

 

 

2

 

 

 

2

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

Other comprehensive income, net of tax

 

 

2

 

 

 

98

 

 

 

3

 

 

 

180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

26

 

 

 

980

 

 

 

642

 

 

 

1,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interests(a)

 

 

(16

)

 

 

(13

)

 

 

(27

)

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Fox Corporation

 

$

10

 

 

$

967

 

 

$

615

 

 

$

1,439

 

 

(a)

Net income attributable to noncontrolling interests includes $10 million and $13 million for the three months ended December 31, 2018 and 2017, respectively, and $21 million and $23 million for the six months ended December 31, 2018 and 2017, respectively, relating to redeemable noncontrolling interests.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Unaudited Combined Financial Statements. 

2


 

FOX CORPORATION

COMBINED BALANCE SHEETS

(IN MILLIONS)

 

 

 

As of

December 31,

2018

 

 

As of

June 30,

2018

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,951

 

 

$

2,500

 

Receivables, net

 

 

2,438

 

 

 

1,833

 

Inventories, net

 

 

1,422

 

 

 

1,180

 

Other

 

 

66

 

 

 

67

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

5,877

 

 

 

5,580

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,150

 

 

 

1,169

 

Intangible assets, net

 

 

2,859

 

 

 

2,866

 

Goodwill

 

 

2,747

 

 

 

2,747

 

Other non-current assets

 

 

833

 

 

 

759

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,466

 

 

$

13,121

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other current liabilities

 

$

1,241

 

 

$

1,759

 

 

 

 

-

 

 

 

 

 

Total current liabilities

 

 

1,241

 

 

 

1,759

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

Other liabilities

 

 

607

 

 

 

422

 

Deferred income taxes

 

 

1,106

 

 

 

1,071

 

Redeemable noncontrolling interests

 

 

106

 

 

 

275

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Twenty-First Century Fox, Inc. investment

 

 

10,596

 

 

 

9,513

 

Accumulated other comprehensive (loss) income

 

 

(202

)

 

 

81

 

 

 

 

-

 

 

 

 

 

Total Fox Corporation equity

 

 

10,394

 

 

 

9,594

 

Noncontrolling interests

 

 

12

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

10,406

 

 

 

9,594

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

13,466

 

 

$

13,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Unaudited Combined Financial Statements.

3


 

FOX CORPORATION

UNAUDITED COMBINED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

 

 

 

For the six months ended

December 31,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

639

 

 

$

1,282

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to cash provided by (used in) operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

94

 

 

 

83

 

Amortization of cable distribution investments

 

 

19

 

 

 

32

 

Other, net

 

 

200

 

 

 

95

 

Deferred income taxes

 

 

57

 

 

 

(580

)

Change in operating assets and liabilities, net of acquisitions and dispositions

 

 

 

 

 

 

 

 

Receivables and other assets

 

 

(587

)

 

 

(574

)

Inventories net of program rights payable

 

 

(168

)

 

 

(243

)

Accounts payable and other liabilities

 

 

(218

)

 

 

(130

)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

36

 

 

 

(35

)

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

(88

)

 

 

(112

)

Proceeds from the relinquishment of spectrum

 

 

-

 

 

 

354

 

Purchase of investments

 

 

(100

)

 

 

-

 

Other investing activities, net

 

 

(63

)

 

 

(3

)

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(251

)

 

 

239

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net transfers to 21CF

 

 

(312

)

 

 

(130

)

Distributions and other

 

 

(22

)

 

 

(37

)

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(334

)

 

 

(167

)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(549

)

 

 

37

 

Cash and cash equivalents, beginning of year

 

 

2,500

 

 

 

19

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

1,951

 

 

$

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these Unaudited Combined Financial Statements.

 

4


 

FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Fox Corporation, a Delaware corporation (“FOX” or the “Company”), is a news, sports and entertainment company, which manages and reports its businesses in the following segments: Cable Network Programming, Television and Other, Corporate and Eliminations.

The Proposed Distribution

On June 20, 2018, Twenty-First Century Fox, Inc. (“Twenty-First Century Fox” or “21CF”), The Walt Disney Company (“Disney”), TWDC Holdco 613 Corp., a wholly-owned subsidiary of Disney (“New Disney”), and certain other subsidiaries of Disney entered into an Amended and Restated Merger Agreement and Plan of Merger, dated June 20, 2018 (the “21CF Disney Merger Agreement”), pursuant to which, among other things, 21CF will merge with and into a subsidiary of New Disney (the “21CF Merger”), Disney will merge with and into a subsidiary of New Disney (the “Disney Merger,” and together with the 21CF Merger, the “mergers”), and each of Disney and 21CF will become wholly-owned subsidiaries of New Disney. A condition to the consummation of the mergers includes the consummation of the Distribution (as defined below).

In connection with the 21CF Disney Merger Agreement and prior to the Distribution, 21CF and its wholly owned subsidiary, FOX, expect to enter into a separation agreement (the “Separation Agreement”), which will become effective on March 19, 2019. Pursuant to the Separation Agreement, 21CF will, among other things, engage in the separation (the “Separation”), whereby it will transfer to FOX a portfolio of 21CF’s news, sports and broadcast businesses, including FOX NewsFOX Business, FOX Broadcasting Company (the “FOX Network”), FOX Sports, FOX Television Stations Group, and sports cable networks FS1, FS2, FOX Deportes and Big Ten Network (collectively, the “FOX business”), and certain other assets, and FOX will assume from 21CF certain liabilities associated with such businesses and certain other liabilities. 21CF will retain all assets and liabilities not transferred to FOX, including the Twentieth Century Fox film and television studios and certain cable and international television businesses. Following the Separation and prior to the completion of the mergers, 21CF will distribute all of the issued and outstanding common stock of FOX to 21CF’s stockholders (other than holders that are subsidiaries of 21CF) on a pro rata basis (the “Distribution”), in accordance with the Amended and Restated Distribution Agreement and Plan of Merger, dated as of June 20, 2018, by and between 21CF and 21CF Distribution Merger Sub, Inc. The Separation and Distribution are anticipated to be completed on March 19, 2019 as part of the series of transactions contemplated by the 21CF Disney Merger Agreement (collectively, the “Transactions”). Following the completion of the Separation and Distribution, FOX will become a standalone public company.

Immediately prior to the Distribution, FOX will pay to 21CF a dividend in the amount of $8.5 billion (the “Dividend”), in immediately available funds. FOX has incurred indebtedness (See Note 5 - Borrowings) that will be, together with available cash, sufficient to fund the Dividend, which cash will be replenished and/or indebtedness will be reduced after the mergers by the amount of the Cash Payment (as defined below), if any.

At the open of business on the business day immediately following the date of the Distribution, if the final estimate of the taxes in respect of the Separation and Distribution and divestitures (as well as certain taxes related to the operations of the FOX business from and after January 1, 2018 through the closing of the Transactions) (collectively, the “Transaction Tax”), is lower than $8.5 billion, Disney will make a cash payment to FOX (the “Cash Payment”), which Cash Payment will be the amount obtained by subtracting the final estimate of the Transaction Tax from $8.5 billion, up to a maximum Cash Payment of $2 billion. After the completion of the mergers, FOX will promptly replenish its cash used, and/or reduce the indebtedness incurred, to fund the Dividend by the amount of the Cash Payment, if any.

In connection with the Transactions, the Company expects to enter into certain other related agreements which govern certain aspects of the Company’s relationship with 21CF and Disney following the Separation and which will become effective on March 19, 2019. These include (i) a tax matters agreement, (ii) intellectual property license agreements, (iii) a studio lot lease and management agreement, (iv) transition services agreements, (v) commercial agreements and (vi) an employee matters agreement.

5


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

Basis of Presentation

The Unaudited Combined Financial Statements of FOX were prepared on a standalone basis, derived from the unaudited consolidated financial statements and accounting records of 21CF. These statements reflect the combined historical results of operations, financial position and cash flows of 21CF’s domestic news, national sports and broadcast businesses and certain other assets and liabilities associated with such businesses 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 Combined 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, 2019.

These interim Unaudited Combined Financial Statements and notes thereto should be read in conjunction with the audited combined financial statements and notes thereto included in the Company’s Registration Statement on Form 10, as amended and filed with the Securities and Exchange Commission (the “SEC”) on January 7, 2019 (the “Form 10”).

These financial statements are presented as if such businesses had been combined for all periods presented. The assets and liabilities in the Unaudited Combined Financial Statements have been reflected on a historical cost basis, as immediately prior to the Distribution all of the assets and liabilities presented are wholly owned by 21CF and are being transferred to the combined FOX group at carry-over basis. The Unaudited Combined Statements of Operations include allocations for certain support functions that are provided on a centralized basis within 21CF and not recorded at the business unit level, such as certain expenses related to finance, legal, insurance, information technology, compliance and human resources management activities, among others. 21CF does not routinely allocate these costs to any of its business units. These expenses have been allocated to FOX on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of combined revenues, headcount or other relevant measures. Management believes the assumptions underlying the Unaudited Combined Financial Statements, including the assumptions regarding allocating general corporate expenses from 21CF, are reasonable. Nevertheless, the Unaudited Combined Financial Statements may not include all of the actual expenses that would have been incurred by FOX and may not reflect FOX’s combined results of operations, financial position and cash flows had it been a standalone company during the periods presented. Actual costs that would have been incurred if FOX had been a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

The income tax (expense) benefit in the Unaudited Combined Statements of Operations has been calculated as if FOX filed a separate tax return and was operating as a standalone business. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of FOX’s actual tax balances prior to or subsequent to the Distribution. In addition, as a result of the Separation and Distribution, FOX will obtain a tax basis in its assets equal to their respective fair market values, which is expected to result in additional annual tax deductions, principally over the next 15 years.

The Unaudited Combined Financial Statements include certain assets and liabilities that have historically been held at 21CF’s corporate level but are specifically identifiable or otherwise attributable to the Company. All significant intracompany transactions and accounts within the Company’s combined businesses have been eliminated.

Intercompany transactions with 21CF or its affiliates and the Company are reflected in the historical Combined Financial Statements. All significant intercompany balances between 21CF and the Company have been included within the 21CF investment in these Unaudited Combined Financial Statements.

Any change in the Company’s ownership interest in a combined subsidiary, where a controlling financial interest is retained, is accounted for as a capital transaction. When the Company ceases to have a controlling interest in a combined subsidiary, the Company will recognize a gain or loss in net income upon deconsolidation.

The preparation of the Company’s Unaudited Combined Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the Unaudited Combined Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.

6


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

The Company’s fiscal year ends on June 30 of each year. Certain fiscal 2018 amounts have been reclassified to conform to the fiscal 2019 presentation.

Recently Adopted and Recently Issued Accounting Guidance and U.S. Tax Reform

Adopted

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments––Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The Company adopted this guidance as of July 1, 2018 on a modified retrospective basis and recorded a cumulative effect adjustment to reclassify unrealized holding gains on securities within Accumulated other comprehensive (loss) income to 21CF investment (See Note 6 – Equity). In addition, the Company recorded changes in the fair value of equity investments with readily determinable fair values in Net income rather than in Accumulated other comprehensive (loss) income (See Note 12 – Additional Financial Information under the heading “Other, net”). Cost method investments that do not have readily determinable fair values will be recognized prospectively at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adjustments related to the observable price changes will also be recognized in net income.

On July 1, 2018, the Company early adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) on a prospective basis using the security-by-security approach. The objective of ASU 2018-02 is to eliminate the stranded tax effects resulting from the Tax Act (as defined below) and to improve the usefulness of information reported to financial statement users. The adoption of ASU 2018-02 resulted in a reclassification from Accumulated other comprehensive (loss) income to 21CF investment related to the income tax effects on the change in the federal statutory rate (See Note 6 – Equity).

Issued

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“Topic 842”), as amended. Topic 842 requires recognition of lease liabilities and right-of-use assets on the balance sheet and disclosure of key information about leasing arrangements. Topic 842 will be effective for the Company for annual and interim reporting periods beginning July 1, 2019. The Company expects to apply Topic 842 on a modified retrospective basis with the cumulative effect, if any, of initially applying the new guidance recognized at the date of adoption as an adjustment to opening retained earnings. The Company is currently evaluating the impact Topic 842 will have on its combined financial statements, including determining which practical expedients to apply. Since the Company has a significant amount of minimum lease commitments (See Note 11 – Commitments and Contingencies in the Form 10), the Company expects that the impact of recognizing operating lease liabilities and right-of-use assets will be significant to the Company’s Combined Balance Sheet. The Company is in process of gathering the necessary lease data and implementing accounting lease software for all leases as well as assessing necessary changes to the Company’s processes and controls to support the recognition and disclosure requirements in accordance with the new standard.

In March 2019, the FASB issued ASU 2019-02, “Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials” (“ASU 2019-02”). The amendments in ASU 2019-02 align the accounting for production costs of episodic television series with the accounting for production costs of films. In addition, ASU 2019-02 modifies certain aspects of the capitalization, impairment, presentation and disclosure requirements in Accounting Standards Codification (“ASC”) 926-20 and the impairment, presentation and disclosure requirements in ASC 920-350. ASU 2019-02 will be effective for the Company for annual and interim reporting periods beginning July 1, 2020 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact ASU 2019-02 will have on its combined financial statements.

U.S. Tax Reform

On December 22, 2017, the U.S. government enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other

7


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

things, lowering U.S. corporate income tax rates and implementing a territorial tax system. Effective July 1, 2018, the Company’s corporate income tax rate is 21%.

The SEC issued guidance that allowed for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of December 31, 2018, the Company has finalized its analysis and has not materially modified the provisional amounts previously recorded in the combined financial statements (See Note 2 – Summary of Significant Accounting Policies in the Form 10 under the heading “U.S. Tax Reform”).

NOTE 2. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS

Fiscal 2019

In the first quarter of fiscal 2019, the Company invested, in the aggregate, approximately $100 million in cash for a minority equity interest in Caffeine, Inc. (“Caffeine”), a social broadcasting platform for gaming, entertainment and other creative content, and Caffeine Studio, LLC (“Caffeine Studios”), a newly formed venture that is jointly owned by the Company and Caffeine. The Company accounts for the investments in Caffeine at cost plus or minus observable price changes and Caffeine Studios as an equity method investment.

Fiscal 2018

In March 2017, the Federal Communications Commission (“FCC”) concluded a voluntary auction to reclaim television broadcast station spectrum. The Company had three stations’ bids of $354 million to relinquish spectrum accepted by the FCC as part of the auction and received the proceeds in July 2017. As a result, spectrum previously utilized by its television stations in Washington, DC, Charlotte, NC and Chicago, IL designated market areas, in which the Company operates duopolies, has been relinquished to the FCC. The Company recorded a pre-tax gain of $114 million of which $102 million was recorded in fiscal 2018 and the remaining balance was recorded in Other, net in the Unaudited Combined Statement of Operations for the six months ended December 31, 2018 for the spectrum relinquished to the FCC in July 2018. These television stations will continue broadcasting using the spectrum of the existing FOX Network owned and operated station in that market.

NOTE 3. INVENTORIES, NET

The Company’s inventories were comprised of the following:

 

 

 

As of

December 31,

2018

 

 

As of

June 30,

2018

 

 

 

(in millions)

 

Sports programming rights

 

$

1,179

 

 

$

983

 

Entertainment programming rights

 

 

398

 

 

 

318

 

 

 

 

 

 

 

 

 

 

Total inventories, net

 

 

1,577

 

 

 

1,301

 

Less: current portion of inventories, net

 

 

(1,422

)

 

 

(1,180

)

 

 

 

 

 

 

 

 

 

Total non-current inventories, net

 

$

155

 

 

$

121

 

 

NOTE 4. 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”).

8


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

The following tables present information about financial assets and liabilities carried at fair value on a recurring basis. As of December 31, 2018 and June 30, 2018, there were no assets or liabilities in the Level 2 category.

 

 

 

Fair value measurements

 

 

 

As of December 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 3

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Investments(a)

 

$

185

 

 

$

185

 

 

$

-

 

Redeemable noncontrolling interests(b)

 

 

(106

)

 

 

-

 

 

 

(106

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

79

 

 

$

185

 

 

$

(106

)

 

 

 

As of June 30, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 3

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Investments(a)

 

$

257

 

 

$

257

 

 

$

-

 

Redeemable noncontrolling interests(b)

 

 

(275

)

 

 

-

 

 

 

(275

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(18

)

 

$

257

 

 

$

(275

)

 

(a)

Represents an investment in equity securities of Roku, Inc. (“Roku”) with a readily determinable fair value.

(b)

The Company utilizes the market approach valuation technique 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 liability. Examples of utilized unobservable inputs are future cash flows and long term growth rates.

Redeemable Noncontrolling Interests

The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity” (“ASC 480-10-S99-3A”), because their exercise is outside the control of the Company. The redeemable noncontrolling interests recorded at fair value are put arrangements held by the noncontrolling interests in one of the Company’s majority-owned sports networks.

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

 

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in millions)

 

Beginning of period

 

$

(83

)

 

$

(172

)

 

$

(275

)

 

$

(154

)

Net income

 

 

(10

)

 

 

(13

)

 

 

(21

)

 

 

(23

)

Distributions

 

 

6

 

 

 

9

 

 

 

19

 

 

 

19

 

Accretion and other

 

 

(19

)

 

 

(19

)

 

 

171

 

(a)

 

(37

)

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

End of period

 

$

(106

)

 

$

(195

)

 

$

(106

)

 

$

(195

)

 

(a)

As a result of the expiration of a portion of the minority shareholder’s put right, approximately $200 million was reclassified into 21CF investment.

As of December 31, 2018, the redeemable noncontrolling interests are not exercisable. A portion of the minority shareholder’s put right will become exercisable in July 2019.

9


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

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.

Generally, the Company does not require collateral to secure receivables. As of December 31, 2018, the Company had no individual customers that accounted for 10% or more of the Company’s receivables. As of June 30, 2018, the Company had two customers that accounted for approximately 21% of the Company’s receivables.

NOTE 5. BORROWINGS

In January 2019, the Company issued $750 million of 3.666% Senior Notes due 2022, $1.25 billion of 4.030% Senior Notes due 2024, $2.00 billion of 4.709% Senior Notes due 2029, $1.25 billion of 5.476% Senior Notes due 2039 and $1.55 billion of 5.576% Senior Notes due 2049 (the “Notes Offering”). The Company intends to use the net proceeds of approximately $6.8 billion from the sale of the notes, together with available cash on its balance sheet and, if needed, borrowings under the Revolving Credit Agreement and/or the Bridge Credit Agreement (each as defined below) to fund the Dividend and to pay fees and expenses incurred in connection with the Notes Offering and the Transactions.

Revolving Credit Agreement

On March 15, 2019, the Company entered into a credit agreement (the “Revolving Credit Agreement”) among the Company as Borrower, the initial lenders named therein, the initial issuing banks named therein, Citibank, N.A., as Administrative Agent, Deutsche Bank Securities Inc. and Goldman Sachs Bank USA, as Co-Syndication Agents, JPMorgan Chase Bank, N.A. and Morgan Stanley Bank, N.A., as Co-Documentation Agents and the other parties party thereto. The Revolving Credit Agreement provides for a $1.0 billion unsecured revolving credit facility with a sub-limit of $150 million available for the issuance of letters of credit and a maturity date of March 2024. Under the Revolving Credit Agreement, the Company may request an increase in the amount of the credit facility commitments up to a maximum facility amount of $1.5 billion and the Company may request that the maturity date be extended for up to two additional one-year periods. The material terms of the Revolving Credit Agreement include the requirement that the Company maintain specific leverage ratios and limitations on indebtedness. The interest rates and fees under the Revolving Credit Agreement are based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the current credit ratings, the interest rate on borrowings under the Revolving Credit Agreement would be London Interbank Offered Rate (“LIBOR”) plus 1.1% and the facility fee is 0.15%. As of March 18, 2019, there were no borrowings outstanding under the Revolving Credit Agreement.

Bridge Credit Agreement

In addition, as previously disclosed, 21st Century Fox America, Inc., a wholly owned subsidiary of 21CF, entered into a commitment letter on behalf of FOX with the financial institutions party thereto to provide FOX with financing in connection with the Dividend. On March 15, 2019, in anticipation of the payment of the Dividend, the Company entered into a $1.7 billion 364-Day Bridge Term Loan Agreement (the “Bridge Credit Agreement”) with the initial lenders named therein, Goldman Sachs Bank USA, as Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and Citibank, N.A. and Deutsche Bank Securities Inc., as Co-Syndication Agents. The material terms of the Bridge Credit Agreement include the requirement that the Company maintain specific leverage ratios and limitations on indebtedness. The interest rates and commitment fee under the Bridge Credit Agreement are based on the Company’s long-term senior unsecured non-credit enhanced debt ratings. Given the Company’s current debt ratings, the initial interest rate on advances will be LIBOR plus 1.25% and will subsequently increase every 90 days up to LIBOR plus 2.00%, and the commitment fee on undrawn funds is 0.125%. The Company will also pay a duration fee on each of the 90th, 180th and 270th day after the funding of the loans in an amount equal to 0.50%, 0.75%, and 1.00%, respectively, of the aggregate amount of the advances outstanding at the time. As of March 18, 2019, no loans have been funded under the Bridge Credit Agreement.

10


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

NOTE 6. EQUITY

The following tables summarize changes in equity:

 

 

 

For the three months ended December 31, 2018

 

 

For the six months ended December 31, 2018

 

 

 

Total FOX equity

 

 

Noncontrolling interests(a)

 

 

Total equity

 

 

Total FOX equity

 

 

Noncontrolling interests(a)

 

 

Total equity

 

 

 

(in millions)

 

Balance, beginning of period

 

$

11,045

 

 

$

9

 

 

$

11,054

 

 

$

9,594

 

 

$

-

 

 

$

9,594

 

Net income

 

 

8

 

 

 

6

 

 

 

14

 

 

 

612

 

 

 

6

 

 

 

618

 

Other comprehensive income

 

 

2

 

 

 

-

 

 

 

2

 

 

 

3

 

 

 

-

 

 

 

3

 

Other

 

 

(19

)

 

 

(3

)

 

 

(22

)

 

 

162

 

(b)

 

6

 

 

 

168

 

Net (decrease) increase in 21CF investment

 

 

(642

)

(c)

 

-

 

 

 

(642

)

 

 

23

 

(c)

 

-

 

 

 

23

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

10,394

 

 

$

12

 

 

$

10,406

 

 

$

10,394

 

 

$

12

 

 

$

10,406

 

 

 

 

For the three months ended December 31, 2017

 

 

For the six months ended December 31, 2017

 

 

 

Total FOX equity

 

 

Noncontrolling interests(a)

 

 

Total equity

 

 

Total FOX equity

 

 

Noncontrolling interests(a)

 

 

Total equity

 

 

 

(in millions)

 

Balance, beginning of period

 

$

6,533

 

 

$

-

 

 

$

6,533

 

 

$

6,093

 

 

$

-

 

 

$

6,093

 

Net income

 

 

869

 

 

 

-

 

 

 

869

 

 

 

1,259

 

 

 

-

 

 

 

1,259

 

Other comprehensive income

 

 

98

 

 

 

-

 

 

 

98

 

 

 

180

 

 

 

-

 

 

 

180

 

Other

 

 

(19

)

 

 

-

 

 

 

(19

)

 

 

(37

)

 

 

-

 

 

 

(37

)

Net increase in 21CF investment

 

 

472

 

 

 

-

 

 

 

472

 

 

 

458

 

 

 

-

 

 

 

458

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

7,953

 

 

$

-

 

 

$

7,953

 

 

$

7,953

 

 

$

-

 

 

$

7,953

 

 

(a)

Excludes Redeemable noncontrolling interests which are reflected in temporary equity (See Note 4 - Fair Value under the heading “Redeemable Noncontrolling Interests”).

(b)

Approximately $200 million was reclassified to 21CF investment from Redeemable noncontrolling interests (See Note 4 - Fair Value).

(c)

Includes accumulated other comprehensive loss of $143 million transferred from 21CF investment (See Note 10 - Pension and Other Postretirement Benefits).

Comprehensive Income

Comprehensive income is reported in the Unaudited Combined Statements of Comprehensive Income and consists of Net income and Other comprehensive income (loss), including unrealized holding gains and losses on securities and benefit plan adjustments, which affect Total equity, and under GAAP, are excluded from Net income.

The following table summarizes the material activity within Other comprehensive income:

 

 

 

For the three months ended
December 31, 2017

 

 

For the six months ended
December 31, 2017

 

 

 

Before tax

 

 

Tax

provision

 

 

Net of tax

 

 

Before tax

 

 

Tax

provision

 

 

Net of tax

 

 

 

(in millions)

 

Gains on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

 

$

154

 

 

$

(58

)

 

$

96

 

 

$

283

 

 

$

(106

)

 

$

177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

$

154

 

 

$

(58

)

 

$

96

 

 

$

283

 

 

$

(106

)

 

$

177

 

 

11


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

Accumulated other comprehensive (loss) income

The following table summarizes the changes in the components of Accumulated other comprehensive (loss) income, net of tax:

 

 

 

For the three months ended December 31, 2018

 

 

For the six months ended December 31, 2018

 

 

 

Unrealized holding gains on securities

 

 

Benefit plan adjustments and other

 

 

Accumulated other comprehensive (loss) income

 

 

Unrealized holding gains on securities

 

 

Benefit plan adjustments and other

 

 

Accumulated other comprehensive (loss) income

 

 

 

(in millions)

 

Balance, beginning of period

 

$

-

 

 

$

(61

)

 

$

(61

)

 

$

130

 

 

$

(49

)

 

$

81

 

Adoption of ASUs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(130

)

(a)

 

(13

)

(b)

 

(143

)

Other comprehensive income, net of tax

 

 

-

 

 

 

2

 

 

 

2

 

 

 

-

 

 

 

3

 

 

 

3

 

Transferred from 21CF investment

 

 

-

 

 

 

(143

)

(c)

 

(143

)

 

 

-

 

 

 

(143

)

(c)

 

(143

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

-

 

 

$

(202

)

 

$

(202

)

 

$

-

 

 

$

(202

)

 

$

(202

)

 

(a)

Reflects the adoption of ASU 2016-01 (See Note 1 - Description of Business and Basis of Presentation under the heading “Recently Adopted and Recently Issued Accounting Guidance and U.S. Tax Reform” for additional information).

(b)

Reflects the adoption of ASU 2018-02 (See Note 1 - Description of Business and Basis of Presentation under the heading “Recently Adopted and Recently Issued Accounting Guidance and U.S. Tax Reform” for additional information).

(c)

See Note 10 - Pension and Other Postretirement Benefits.

 

NOTE 7. EQUITY-BASED COMPENSATION

Until the completion of the Distribution, the Company’s employees participate in 21CF’s equity plans. 21CF has plans authorized to grant equity awards of 21CF stock to the Company’s employees. The equity-based compensation expense recorded by the Company, in the periods presented, includes the expense associated with the employees historically attributable to the Company’s operations, as well as the expense associated with the allocation of equity-based compensation expense for corporate employees.

The Company will have a new equity compensation plan relating to equity awards of FOX stock, the Fox Corporation 2019 Shareholder Alignment Plan (the “SAP”), that will become effective in connection with the Distribution. Equity-based compensation, including stock options, stock appreciation rights, restricted and unrestricted stock, restricted stock units (“RSUs”) and other types of FOX equity awards may be granted. The Company’s officers, directors and employees will be eligible to participate in the SAP.

In connection with the Distribution, 21CF performance stock units (“PSUs”) scheduled to vest in 2019 and 50% of 21CF retention RSUs were accelerated and paid out in shares of 21CF class A common stock in March 2019. 21CF RSUs and PSUs scheduled to vest after 2019 will be converted into new equity awards of the Company, using a formula designed to preserve the value of the awards immediately prior to the Distribution. Converted awards will have the same terms and features as the original 21CF awards, except for the PSUs, which will be converted into RSUs that will be subject only to time-based vesting conditions and will no longer be subject to achievement of applicable performance goals. In addition, the remaining 50% of the 21CF retention RSUs will be converted into new FOX equity awards and Disney equity awards on the same pro rata basis accorded to shareholders of 21CF common stock in the mergers. All of the converted FOX equity awards will be made under the SAP.

The Compensation Committee of the Board of Directors of FOX will consider making initial grants under the SAP in connection with the Distribution. These shareholder alignment grants would likely consist of a mix of stock options and RSUs.

12


FOX CORPORATION

NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS

 

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

 

 

 

For the three months ended December 31,

 

 

For the six months ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in millions)

 

Equity-based compensation(a)

 

$

12

 

 

$

15

 

 

$

33

 

 

$

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrinsic value of all settled equity-based awards

 

$

8

 

 

$

-

 

 

$

110

 

 

$

31

 

 

(a)

Includes allocated expense for both executive directors and corporate executives of 21CF, allocated using a proportional allocation driver, which management has deemed to be reasonable.