UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended |
or
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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
(Exact Name of Registrant as Specified in its Charter)
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(State or Other Jurisdiction |
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(I.R.S. Employer |
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(Address of Principal Executive Offices) |
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Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
Trading Symbols |
Name of Each Exchange |
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Class A |
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Class B |
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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.
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).
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 growth 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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 Act). Yes
As of October 30, 2020,
FOX CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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Page |
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Part I. Financial Information |
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Item 1. |
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Financial Statements |
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1 |
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2 |
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Consolidated Balance Sheets as of September 30, 2020 (unaudited) and June 30, 2020 (audited) |
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Unaudited Consolidated Statements of Equity for the three months ended September 30, 2020 and 2019 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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29 |
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Item 4. |
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29 |
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Part II. Other Information |
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Item 1. |
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30 |
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Item 1A. |
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30 |
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Item 2. |
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30 |
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Item 3. |
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31 |
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Item 4. |
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31 |
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Item 5. |
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31 |
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Item 6. |
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32 |
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33 |
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FOX CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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For the three months ended September 30, |
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2020 |
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2019 |
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Revenues |
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$ |
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$ |
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Operating expenses |
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Selling, general and administrative |
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Depreciation and amortization |
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Impairment and restructuring charges |
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Interest expense |
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Interest income |
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Other, net |
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Income before income tax expense |
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Income tax expense |
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Net income |
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Less: Net income attributable to noncontrolling interests |
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Net income attributable to Fox Corporation stockholders |
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$ |
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$ |
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EARNINGS PER SHARE DATA |
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Weighted average shares |
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Basic |
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Diluted |
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Net income attributable to Fox Corporation stockholders per share - basic and diluted |
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$ |
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$ |
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The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
1
FOX CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
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For the three months ended September 30, |
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2020 |
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2019 |
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Net income |
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$ |
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$ |
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Other comprehensive income, net of tax |
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Benefit plan adjustments |
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Other comprehensive income, net of tax |
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Comprehensive income |
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Less: Net income attributable to noncontrolling interests(a) |
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Comprehensive income attributable to Fox Corporation stockholders |
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$ |
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$ |
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(a) |
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The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
2
FOX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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As of September 30, 2020 |
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As of June 30, 2020 |
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(unaudited) |
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(audited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, net |
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Inventories, net |
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Other |
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Total current assets |
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Non-current assets |
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Property, plant and equipment, net |
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Intangible assets, net |
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Goodwill |
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Deferred tax assets |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities |
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Accounts payable, accrued expenses and other current liabilities |
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$ |
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$ |
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Non-current liabilities |
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Borrowings |
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Other liabilities |
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Redeemable noncontrolling interests |
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Commitments and contingencies |
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Equity |
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Class A common stock(a) |
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Class B common stock(b) |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total Fox Corporation stockholders' equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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(a) |
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The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
3
FOX CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
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For the three months ended September 30, |
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2020 |
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2019 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to cash provided by operating activities |
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Depreciation and amortization |
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Amortization of cable distribution investments |
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Impairment and restructuring charges |
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Equity-based compensation |
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Other, net |
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Deferred income taxes |
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Change in operating assets and liabilities, net of acquisitions and dispositions |
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Receivables and other assets |
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Inventories net of program rights payable |
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Accounts payable and accrued expenses |
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Other changes, net |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Property, plant and equipment |
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Purchase of investments |
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Other investing activities, net |
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Net cash used in investing activities |
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FINANCING ACTIVITIES |
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Repurchase of shares |
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Non-operating cash flows from (to) The Walt Disney Company |
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Settlement of Divestiture Tax prepayment |
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Dividends paid and distributions |
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Other financing activities, net |
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Net cash provided by (used in) financing activities |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents, beginning of year |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
4
FOX CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(IN MILLIONS)
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Class A |
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Class B |
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Additional |
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Accumulated Other |
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Total Fox Corporation |
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Common Stock |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Stockholders' |
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Noncontrolling |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Interests(a) |
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Equity |
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Balance, June 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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Other comprehensive income |
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- |
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- |
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Dividends declared |
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- |
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- |
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Shares repurchased |
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Other |
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Balance, September 30, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Balance, June 30, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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Other comprehensive income |
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- |
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- |
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Dividends declared |
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- |
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- |
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( |
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Other |
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Balance, September 30, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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(a) |
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The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
5
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED 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 accompanying Unaudited Consolidated Financial Statements of FOX have been prepared in accordance with United States (“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, 2021, due to, among other things, the impact of coronavirus disease 2019 (“COVID-19”) on the Company’s business.
The preparation of the Company’s Unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the Unaudited Consolidated 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.
The outbreak of the COVID-19 pandemic has resulted in widespread and continuing negative impacts on the macroeconomic environment and disruption to the Company’s business. Weak economic conditions and increased volatility and disruption in the financial markets pose risks to the Company and its business partners, including advertisers whose expenditures tend to reflect overall economic conditions. The COVID-19 pandemic has caused some of the Company’s advertisers to reduce their spending, and future declines in the economic prospects of advertisers or the economy in general could negatively impact their advertising expenditures further. Depending on the duration and severity of the recession, it could lead to changes in consumer behavior, including increasing numbers of consumers canceling or foregoing subscriptions to multi-channel video programming distributor (“MVPD”) services, that adversely affect the Company’s affiliate fee and advertising revenues. In addition, the Company’s business depends on the volume and popularity of the content it distributes, particularly sports content. Following the COVID-19 outbreak, sports events to which the Company has broadcast rights have been cancelled or postponed and the production of certain entertainment content the Company distributes has been suspended. Although some of these sports events and productions have resumed, there may be additional content disruptions in the future. Depending on their duration and severity, these disruptions could materially adversely affect the Company’s future advertising revenues and, over a longer period, its future affiliate fee revenues. To the extent the pandemic further negatively impacts the Company’s ability to air sports events, particularly National Football League (“NFL”) and college sports, it could result in a significantly greater adverse effect on the Company’s business, financial condition or results of operations than the Company has experienced thus far. In addition, shifting sports schedules may negatively impact the Company’s ability to attract viewers and advertisers to its sports and entertainment programming.
The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the best estimates of the future impacts of COVID-19 as of September 30, 2020. The accounting matters assessed included, but were not limited to, the Company’s valuation allowances, programming rights and the carrying value of the goodwill and other long-lived assets. While there was not an impact to the Company’s consolidated financial statements as of September 30, 2020, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
These interim Unaudited Consolidated Financial Statements and notes thereto should be read in conjunction with the audited consolidated and combined financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 as filed with the Securities and Exchange Commission on August 10, 2020 (the “2020 Form 10-K”).
6
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Consolidated Financial Statements include the accounts of FOX. All significant intercompany transactions and accounts within the Company’s consolidated businesses have been eliminated. Investments in and advances to entities or joint ventures in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method. Significant influence generally exists when the Company owns an interest between 20% and 50%. In accordance with Accounting Standards Codification (“ASC”) 321 “Investments—Equity Securities” (“ASC 321”), equity securities in which the Company has no significant influence (generally less than a 20% ownership interest) with readily determinable fair values are accounted for at fair value based on quoted market prices. Equity securities without readily determinable fair values are accounted for either at fair value or using the measurement alternative which is 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. All gains and losses on investments in equity securities are recognized in the Unaudited Consolidated Statements of Operations.
Pursuant to the merger agreement relating to the merger of Twenty-First Century Fox, Inc. (“21CF”) and The Walt Disney Company (“Disney”), the Company made a prepayment of approximately $
The Company’s fiscal year ends on June 30 of each year. Certain fiscal 2020 amounts have been reclassified to conform to the fiscal 2021 presentation.
The unaudited and audited consolidated financial statements are referred to as the “Financial Statements” herein. The unaudited consolidated statements of operations are referred to as the “Statements of Operations” herein. The unaudited and audited consolidated balance sheets are referred to as the “Balance Sheets” herein.
Recently Adopted and Recently Issued Accounting Guidance
Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), as amended. On July 1, 2020, the Company adopted ASU 2016-13 on a modified retrospective basis. The amendments in ASU 2016-13 require, among other things, financial assets measured at amortized cost basis to be presented at the net amount expected to be collected as compared to previous GAAP which delayed recognition until it was probable a loss had been incurred. The adoption of ASU 2016-13 did not have a material impact on the Company’s Financial Statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). On July 1, 2020, the Company adopted ASU 2018-15 on a prospective basis. The amendments in ASU 2018-15 require implementation costs incurred in a hosting arrangement that is a service contract to be capitalized using the same guidance for capitalizing implementation costs incurred to develop or obtain internal-use software. In addition, ASU 2018-15 provides guidance regarding the term over which capitalized implementation costs are to be amortized and requires specific financial statement presentation and disclosures. The adoption of ASU 2018-15 did not have a material impact on the Company’s Financial Statements.
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”). On July 1, 2020, the Company adopted ASU 2019-02 on a prospective basis and reclassified entertainment programming rights, with a contract duration of longer than a year, that were previously classified as the current portion of inventories, net to non-current inventories, net on the Balance Sheet. The amendments in ASU 2019-02 align the accounting treatment for production costs of episodic television series with the accounting treatment for production costs of films. In addition,
7
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ASU 2019-02 modifies certain aspects of the amortization, impairment, presentation and disclosure requirements in ASC 926-20 and the impairment, presentation and disclosure requirements in ASC 920-350, including eliminating the balance sheet classification guidance. The adoption of ASU 2019-02 did not have a significant impact on the Company’s Financial Statements (See Note 3—Inventories, net for additional information).
NOTE 2. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS
The Company’s acquisitions support the Company’s strategy to strengthen its core brands and leverage its sports broadcasting rights and expand their reach beyond their traditional linear businesses. For the acquisitions in Note 3—Acquisitions, Disposals and Other Transactions in the 2020 Form 10-K under the heading “Acquisitions and Disposals,” the accounting for each business combination, including consideration transferred, is based on provisional amounts and the allocation of the consideration transferred is not final. The amounts allocated to intangibles and goodwill, the estimates of useful lives and the related amortization expense are subject to changes pending the completion of the final valuations of certain assets and liabilities. A change in the allocation of consideration transferred and any estimates of useful lives could result in a change in the value allocated to the intangible assets that could impact future amortization expense.
NOTE 3. INVENTORIES, NET
In accordance with ASC 920, “Entertainment—Broadcasters” (“ASC 920”), costs incurred in acquiring program rights or producing programs for the Cable Network Programming and Television segments, including advances, are capitalized and amortized over the license period or projected useful life of the programming. Program rights and the related liabilities are recorded at the gross amount of the liabilities when the license period has begun, the cost of the program is determinable and the program is accepted and available for airing. Effective for the Company beginning on July 1, 2020, ASC 920 permits program rights to be recorded in non-current inventories, net rather than segregated between current and non-current inventories, net. As a result, the Company reclassified entertainment programming rights, with a contract duration of longer than a year, that were previously classified as the current portion of inventories, net to non-current inventories, net on the Balance Sheet. Advances on sports events expected to be broadcast within one year and programs with an initial license period of one year or less continue to be recorded in the current portion of inventories, net. Television broadcast network entertainment programming, which includes acquired series, co-produced series, movies and other programs, are amortized primarily on an accelerated basis.
The Company has single and multi-year contracts for broadcast rights of programs and sports events. The Company evaluates the recoverability of the unamortized costs associated therewith, using total estimated advertising and other revenues attributable to the program material and considering the Company’s expectations of the usefulness of the program rights. The recoverability of entertainment programming is generally assessed on a contract basis and the recoverability of certain sports rights contracts for content broadcast on the FOX Network and the sports channels is assessed on an aggregate basis. Where an evaluation indicates that these multi-year contracts will result in an asset that is not recoverable, amortization of rights is accelerated in an amount equal to the amount by which the unamortized costs exceed fair value. The costs of multi-year sports contracts at the FOX Network and the sports channels are primarily amortized based on the ratio of each current period’s attributable revenue for each contract to the estimated total remaining attributable revenue for each contract. Estimates can change and, accordingly, are reviewed periodically and amortization is adjusted as necessary. Such changes in the future could be material.
|
|
|
As of September 30, 2020 |
|
|
As of June 30, 2020 |
|
||
|
|
|
(in millions) |
|
|||||
|
Sports programming rights |
|
$ |
|
|
|
$ |
|
|
|
Entertainment programming rights |
|
|
|
|
|
|
|
|
|
Total inventories, net |
|
|
|
|
|
|
|
|
|
Less: current portion of inventories, net |
|
|
( |
) |
|
|
( |
) |
|
Total non-current inventories, net |
|
$ |
|
|
|
$ |
|
|
8
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended September 30, 2020, the aggregate amortization expense related to the programming rights was approximately $
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”).
The following tables present information about financial assets and liabilities carried at fair value on a recurring basis:
|
|
|
Fair value measurements |
|
|||||||||||||
|
|
|
As of September 30, 2020 |
|
|||||||||||||
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
|
(in millions) |
|
|||||||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in equity securities |
|
$ |
|
|
|
$ |
|
(a) |
|
$ |
|
|
|
$ |
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
(b) |
|
Redeemable noncontrolling interests |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
(b) |
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
|
|
|
|
Fair value measurements |
|
|||||||||||||
|
|
|
As of June 30, 2020 |
|
|||||||||||||
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
|
(in millions) |
|
|||||||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in equity securities |
|
$ |
|
|
|
$ |
|
(a) |
|
$ |
|
|
|
$ |
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
(b) |
|
Redeemable noncontrolling interests |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
(b) |
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
|
|
(a) |
|
|
(b) |
|
Redeemable Noncontrolling Interests
The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity,” because their exercise is outside the control of the Company. The redeemable noncontrolling interests recorded are put rights held by minority shareholders in a majority-owned sports network and in Credible Labs Inc. (“Credible”).
9
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
Net income |
|
|
( |
) |
|
|
( |
) |
|
Distributions |
|
|
|
|
|
|
|
|
|
Accretion |
|
|
( |
) |
|
|
( |
) |
|
End of period |
|
$ |
( |
) |
|
$ |
( |
) |
Financial Instruments
The carrying value of the Company’s financial instruments, such as cash and cash equivalents, receivables, payables and investments accounted for using the measurement alternative in accordance with ASC 321, approximates fair value.
|
|
|
As of September 30, 2020 |
|
|
As of June 30, 2020 |
|
||
|
|
|
(in millions) |
|
|||||
|
Borrowings |
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
|
|
|
$ |
|
|
|
Carrying value |
|
$ |
|
|
|
$ |
|
|
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).
Concentrations of Credit Risk
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
The Company’s receivables did
NOTE 5. BORROWINGS
Senior Notes Issued
Borrowings include senior notes (See Note 9—Borrowings in the 2020 Form 10-K under the heading “Public Debt – Senior Notes Issued”). In addition, the Company is party to a credit agreement providing a $
10
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
In fiscal 2020, the Company’s Board of Directors (the “Board”) authorized a stock repurchase program providing for the repurchase of $
In accordance with the ASR agreements, in August 2020, the Company paid a third-party financial institution $
In addition to the shares purchased under the ASR agreements, the Company repurchased shares of Class A Common Stock and Class B Common Stock in the open market. In total, the Company repurchased approximately
Repurchased shares are retired and reduce the number of shares issued and outstanding. The Company allocates the amount of the repurchase price over par value between additional paid-in capital and retained earnings.
As of September 30, 2020, the Company’s remaining stock repurchase authorization was approximately $
Dividends
The following table summarizes the dividends declared per share on both the Company’s Class A Common Stock and Class B Common Stock:
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash dividend per share |
|
$ |
|
|
|
$ |
|
|
The Company declared a semi-annual dividend of $
11
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. EQUITY-BASED COMPENSATION
As of September 30, 2020, the Company has
The following table summarizes the Company’s equity-based compensation:
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Equity-based compensation |
|
$ |
|
|
|
$ |
|
|
|
Intrinsic value of all settled equity-based awards |
|
$ |
|
|
|
$ |
|
|
|
Tax benefit on settled equity-based awards |
|
$ |
|
|
|
$ |
|
|
The Company’s stock based awards are settled in Class A Common Stock. As of September 30, 2020, the Company’s total estimated compensation cost, not yet recognized, related to non-vested equity awards held by the Company’s employees was approximately $
As of September 30, 2020 and 2019, the Company had approximately
Awards Granted and Vested
Restricted Stock Units
During the three months ended September 30, 2020, approximately
Performance-Based Stock Options
Performance-based stock options (“PSOs”) are awards that entitle the holder to purchase a specified number of shares of Class A Common Stock at a specified price for a specified period of time, contingent on the performance of the Class A Common Stock over a three-year period, subject to the terms and conditions of the SAP, the applicable award documents and such other terms and conditions as the Compensation Committee of the Board may establish. The PSOs granted under the SAP will vest in full only if the Company’s Class A Common Stock exceeds the exercise price of the PSO by a certain threshold over a certain period of time during the performance period (the “market condition”). The PSOs were fair valued using a Monte Carlo simulation model that uses the following assumptions: (i) expected volatility; (ii) expected term; (iii) risk-free interest rate; and (iv) expected dividend yield. Compensation cost related to the PSO will be recognized even if the market condition is not met.
During the three months ended September 30, 2020, the Company granted approximately
NOTE 8. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has commitments under certain firm contractual arrangements (“firm commitments”) to make future payments. These firm commitments secure the future rights to various assets and services to be used in the normal course of operations. The total firm commitments and future debt payments as of September 30, 2020 have not changed significantly from disclosures included in the 2020 Form 10-K.
12
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
FOX News
The Company’s FOX News business and certain of its current and former employees have been subject to allegations of sexual harassment and discrimination on the basis of sex and race. The Company has resolved many of these claims and is contesting other claims in litigation. The Company has also received regulatory and investigative inquiries relating to these matters. To date, none of the amounts paid in settlements or reserved for pending or future claims is material, individually or in the aggregate, to the Company. The amount of additional liability, if any, that may result from these or related matters cannot be estimated at this time. However, the Company does not currently anticipate that the ultimate resolution of any such pending matters will have a material adverse effect on its business, financial condition, results of operations or cash flows.
U.K. Newspaper Matters Indemnity
In connection with the separation of 21CF and News Corporation in June 2013 (the “21CF News Corporation Separation”), 21CF agreed to indemnify News Corporation, on an after-tax basis, for payments made after the 21CF News Corporation Separation arising out of civil claims and investigations relating to phone hacking, illegal data access and inappropriate payments to public officials that occurred at subsidiaries of News Corporation before the 21CF News Corporation Separation, 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 Corporation (the “U.K. Newspaper Matters Indemnity”). In accordance with the Separation Agreement (as defined in Note 1—Description of Business and Basis of Presentation in the 2020 Form 10-K under the heading “The Distribution”), the Company assumed certain costs and liabilities related to the U.K. Newspaper Matters Indemnity. The liability recorded in the Balance Sheets related to the indemnity was approximately $
Other
The Company establishes an accrued liability for legal claims and indemnification claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. Any fees, expenses, fines, penalties, judgments or settlements which might be incurred by the Company in connection with the various proceedings could affect the Company’s results of operations and financial condition. For the contingencies disclosed above for which there is at least a reasonable possibility that a loss may be incurred, other than the accrual provided, the Company was unable to estimate the amount of loss or range of loss.
The Company’s operations are subject to tax in various domestic jurisdictions and as a matter of course, the Company is regularly audited by federal and state tax authorities. The Company believes it has appropriately accrued for the expected outcome of all pending tax matters and does not currently anticipate that the ultimate resolution of pending tax matters will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity. Each member of the 21CF consolidated group, which includes 21CF, the Company (prior to the Distribution (as defined in Note 1—Description of Business and Basis of Presentation in the 2020 Form 10-K under the heading “The Distribution”)) and 21CF’s other subsidiaries, is jointly and severally liable for the U.S. federal income and, in certain jurisdictions, state tax liabilities of each other member of the consolidated group. Consequently, the Company could be liable in the event any such liability is incurred, and not discharged, by any other member of the 21CF consolidated group. The tax matters agreement requires 21CF and/or Disney to indemnify the Company for any such liability. Disputes or assessments could arise during future audits by the Internal Revenue Service in amounts that the Company cannot quantify.
NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in and/or sponsors various pension, savings and postretirement benefit plans. Pension plans and postretirement benefit plans are closed to new participants with the exception of a small group covered by collective bargaining agreements. The net periodic benefit cost was $
13
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SEGMENT INFORMATION
The Company is a news, sports and entertainment company, which manages and reports its businesses in the following segments:
|
|
• |
Cable Network Programming, which principally consists of the production and licensing of news and sports content distributed primarily through traditional cable television systems, direct broadcast satellite operators and telecommunication companies (“traditional MVPDs”) and online multi-channel video programming distributors (“digital MVPDs”), primarily in the U.S. |
|
|
• |
Television, which principally consists of the acquisition, marketing and distribution of broadcast network programming nationally under the FOX brand and the operation of |
|
|
• |
Other, Corporate and Eliminations, which principally consists of the FOX Studio Lot, Credible, corporate overhead costs and intracompany eliminations. The FOX Studio Lot, located in Los Angeles, California, provides television and film production services along with office space, studio operation services and includes all operations of the facility. Credible is a U.S. consumer finance marketplace. |
The Company’s operating segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measure is segment operating income before depreciation and amortization, or Segment EBITDA. Due to the integrated nature of these operating segments, estimates and judgments are made in allocating certain assets, revenues and expenses.
Segment EBITDA is defined as Revenues less Operating expenses and Selling, general and administrative expenses. Segment EBITDA does not include: Amortization of cable distribution investments, Depreciation and amortization, Impairment and restructuring charges, Interest expense, Interest income, Other, net and Income tax expense. Management believes that Segment EBITDA is an appropriate measure for evaluating the operating performance of the Company’s business segments because it is the primary measure used by the Company’s chief operating decision maker to evaluate the performance of and allocate resources to the Company’s businesses.
14
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the Company’s Revenues and Segment EBITDA for the three months ended September 30, 2020 and 2019:
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Revenues |
|
|
|
|
|
|
|
|
|
Cable Network Programming |
|
$ |
|
|
|
$ |
|
|
|
Television |
|
|
|
|
|
|
|
|
|
Other, Corporate and Eliminations |
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
Segment EBITDA |
|
|
|
|
|
|
|
|
|
Cable Network Programming |
|
$ |
|
|
|
$ |
|
|
|
Television |
|
|
|
|
|
|
|
|
|
Other, Corporate and Eliminations |
|
|
( |
) |
|
|
( |
) |
|
Amortization of cable distribution investments |
|
|
( |
) |
|
|
( |
) |
|
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
Impairment and restructuring charges |
|
|
( |
) |
|
|
( |
) |
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
Interest income |
|
|
|
|
|
|
|
|
|
Other, net |
|
|
|
|
|
|
( |
) |
|
Income before income tax expense |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
( |
) |
|
|
( |
) |
|
Net income |
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
Net income attributable to Fox Corporation stockholders |
|
$ |
|
|
|
$ |
|
|
Revenues by Segment by Component
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Cable Network Programming |
|
|
|
|
|
|
|
|
|
Affiliate fee |
|
$ |
|
|
|
$ |
|
|
|
Advertising |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total Cable Network Programming revenues |
|
|
|
|
|
|
|
|
|
Television |
|
|
|
|
|
|
|
|
|
Advertising |
|
|
|
|
|
|
|
|
|
Affiliate fee |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total Television revenues |
|
|
|
|
|
|
|
|
|
Other, Corporate and Eliminations |
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
Future Performance Obligations
As of September 30, 2020, approximately $
15
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
are in the form of sales- or usage-based royalties and (iii) revenues related to performance obligations for which the Company elects to recognize revenue in the amount it has a right to invoice.
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Cable Network Programming |
|
$ |
|
|
|
$ |
|
|
|
Television |
|
|
|
|
|
|
|
|
|
Other, Corporate and Eliminations |
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
|
|
|
$ |
|
|
|
|
|
As of September 30, 2020 |
|
|
As of June 30, 2020 |
|
||
|
|
|
(in millions) |
|
|||||
|
Assets |
|
|
|
|
|
|
|
|
|
Cable Network Programming |
|
$ |
|
|
|
$ |
|
|
|
Television |
|
|
|
|
|
|
|
|
|
Other, Corporate and Eliminations |
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Impairment and Restructuring Charges
Impairment and restructuring charges were $
Other, net
The following table sets forth the components of Other, net included in the Statements of Operations:
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Transaction costs(a) |
|
$ |
|
|
|
$ |
( |
) |
|
Net gains on investments in equity securities(b) |
|
|
|
|
|
|
|
|
|
Other |
|
|
( |
) |
|
|
( |
) |
|
Total other, net |
|
$ |
|
|
|
$ |
( |
) |
|
(a) |
|
|
(b) |
|
16
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other Non-Current Assets
The following table sets forth the components of Other non-current assets included in the Balance Sheets:
|
|
|
As of September 30, 2020 |
|
|
As of June 30, 2020 |
|
||
|
|
|
(in millions) |
|
|||||
|
Investments(a) |
|
$ |
|
|
|
$ |
|
|
|
Operating lease ROU assets |
|
|
|
|
|
|
|
|
|
Grantor Trust |
|
|
|
|
|
|
|
|
|
Inventories, net |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other non-current assets |
|
$ |
|
|
|
$ |
|
|
|
(a) |
|
Accounts Payable, Accrued Expenses and Other Current Liabilities
The following table sets forth the components of Accounts payable, accrued expenses and other current liabilities included in the Balance Sheets:
|
|
|
As of September 30, 2020 |
|
|
As of June 30, 2020 |
|
||
|
|
|
(in millions) |
|
|||||
|
Accrued expenses |
|
$ |
|
|
|
$ |
|
|
|
Program rights payable |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
|
Total accounts payable, accrued expenses and other current liabilities |
|
$ |
|
|
|
$ |
|
|
Other Liabilities
The following table sets forth the components of Other liabilities included in the Balance Sheets:
|
|
|
As of September 30, 2020 |
|
|
As of June 30, 2020 |
|
||
|
|
|
(in millions) |
|
|||||
|
Accrued non-current pension/postretirement liabilities |
|
$ |
|
|
|
$ |
|
|
|
Non-current operating lease liabilities |
|
|
|
|
|
|
|
|
|
Other non-current liabilities |
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
$ |
|
|
|
$ |
|
|
Supplemental Cash Flows Information
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Cash paid for interest |
|
$ |
( |
) |
|
$ |
( |
) |
|
Cash paid for income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
17
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Readers should carefully review this document and the other documents filed by Fox Corporation (“FOX” or the “Company”) with the Securities and Exchange Commission (the “SEC”). This section should be read together with the unaudited interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K for the fiscal year ended June 30, 2020 as filed with the SEC on August 10, 2020 (the “2020 Form 10-K”). The unaudited consolidated financial statements are referred to as the “Financial Statements” herein.
INTRODUCTION
Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Company’s financial condition, changes in financial condition and results of operations. This discussion is organized as follows:
|
|
• |
Overview of the Company’s Business—This section provides a general description of the Company’s businesses, as well as developments that occurred during the three months ended September 30, 2020 and 2019 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends. |
|
|
• |
Results of Operations—This section provides an analysis of the Company’s results of operations for the three months ended September 30, 2020 and 2019. This analysis is presented on both a consolidated and a segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed. |
|
|
• |
Liquidity and Capital Resources—This section provides an analysis of the Company’s cash flows for the three months ended September 30, 2020 and 2019, as well as a discussion of the Company’s outstanding debt and commitments, both firm and contingent, that existed as of September 30, 2020. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company’s future commitments and obligations, as well as a discussion of other financing arrangements. |
|
|
• |
Caution Concerning Forward-Looking Statements—This section provides a description of the use of forward-looking information appearing in this Quarterly Report on Form 10-Q, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such information is based on management’s current expectations about future events which are subject to change and to inherent risks and uncertainties. Refer to Part I., Item 1A, “Risk Factors” in the 2020 Form 10-K for a discussion of the risk factors applicable to the Company. |
OVERVIEW OF THE COMPANY’S BUSINESS
The Company is a news, sports and entertainment company, which manages and reports its businesses in the following segments:
|
|
• |
Cable Network Programming, which principally consists of the production and licensing of news and sports content distributed primarily through traditional cable television systems, direct broadcast satellite operators and telecommunication companies (“traditional MVPDs”) and online multi-channel video programming distributors (“digital MVPDs”), primarily in the U.S. |
|
|
• |
Television, which principally consists of the acquisition, marketing and distribution of broadcast network programming nationally under the FOX brand and the operation of 29 full power broadcast television stations, including 11 duopolies, in the U.S. Of these stations, 18 are affiliated with the FOX Network, 10 are affiliated with MyNetworkTV and one is an independent station. The Television segment also includes Tubi, Inc. (“Tubi”), a free advertising-supported video-on-demand (“AVOD”) service. |
|
|
• |
Other, Corporate and Eliminations, which principally consists of the FOX Studio Lot, Credible Labs Inc. (“Credible”), corporate overhead costs and intracompany eliminations. The FOX Studio Lot, located in Los Angeles, California, provides television and film production services along with office space, studio operation services and includes all operations of the facility. Credible is a U.S. consumer finance marketplace. |
18
Other Business Developments
The outbreak of the coronavirus disease 2019 (“COVID-19”) pandemic has resulted in widespread and continuing negative impacts on the macroeconomic environment and disruption to the Company’s business. Weak economic conditions and increased volatility and disruption in the financial markets pose risks to the Company and its business partners, including advertisers whose expenditures tend to reflect overall economic conditions. The COVID-19 pandemic has caused some of the Company’s advertisers to reduce their spending, and future declines in the economic prospects of advertisers or the economy in general could negatively impact their advertising expenditures further. Depending on the duration and severity of the recession, it could lead to changes in consumer behavior, including increasing numbers of consumers canceling or foregoing subscriptions to multi-channel video programming distributor (“MVPD”) services, that adversely affect the Company’s affiliate fee and advertising revenues. In addition, the Company’s business depends on the volume and popularity of the content it distributes, particularly sports content. Following the COVID-19 outbreak, sports events to which the Company has broadcast rights have been cancelled or postponed and the production of certain entertainment content the Company distributes has been suspended. Although some of these sports events and productions have resumed, there may be additional content disruptions in the future. Depending on their duration and severity, these disruptions could materially adversely affect the Company’s future advertising revenues and, over a longer period, its future affiliate fee revenues. To the extent the pandemic further negatively impacts the Company’s ability to air sports events, particularly National Football League (“NFL”) and college sports, it could result in a significantly greater adverse effect on the Company’s business, financial condition or results of operations than the Company has experienced thus far. In addition, shifting sports schedules may negatively impact the Company’s ability to attract viewers and advertisers to its sports and entertainment programming. The Company’s Television segment experienced a 15% decline in advertising revenue and to a lesser extent the Cable Network Programming segment in the quarter ended September 30, 2020. The Company estimates that the majority of these decreases are due to the ongoing impact of COVID-19, including sports events that have been cancelled or postponed and fewer hours of original scripted programming. As a result of the shifting schedules, the Company estimates that there was a corresponding decrease of approximately $280 million of sports and entertainment programming rights amortization and production costs in the quarter ended September 30, 2020. The Company believes that a majority of these costs will be recognized in fiscal 2021.
Pursuant to the merger agreement relating to the merger of Twenty-First Century Fox, Inc. (“21CF”) and The Walt Disney Company (“Disney”), the Company made a prepayment of approximately $700 million which represented the Company’s share of the estimated tax liabilities resulting from the anticipated divestitures by Disney of certain assets (the “Divestiture Tax”), principally the FOX Sports Regional Sports Networks (“RSNs”). As of September 30, 2020, Disney had sold the RSNs, the Company and Disney reached an agreement to settle the majority of the prepaid Divestiture Tax and the Company received $462 million from Disney as reimbursement of the Company’s prepayment based upon the sales price of the RSNs. This reimbursement was recorded in Other, net in the Statement of Operations. See Note 11—Additional Financial Information to the accompanying Financial Statements under the heading “Other, net.”
19
RESULTS OF OPERATIONS
Results of Operations—For the three months ended September 30, 2020 versus the three months ended September 30, 2019
The following table sets forth the Company’s operating results for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019:
|
|
|
For the three months ended September 30, |
||||||||||||||||||
|
|
|
2020 |
|
|
|
|
2019 |
|
|
Change |
|
|
% Change |
|||||||
|
(in millions, except %) |
|
|
|
|
|
|
|
|
|
|
|
Better/(Worse) |
||||||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate fee |
|
$ |
1,533 |
|
|
|
|
$ |
1,394 |
|
|
$ |
139 |
|
|
|
10 |
|
% |
|
|
Advertising |
|
|
969 |
|
|
|
|
|
1,041 |
|
|
|
(72 |
) |
|
|
(7 |
) |
% |
|
|
Other |
|
|
215 |
|
|
|
|
|
232 |
|
|
|
(17 |
) |
|
|
(7 |
) |
% |
|
|
Total revenues |
|
|
2,717 |
|
|
|
|
|
2,667 |
|
|
|
50 |
|
|
|
2 |
|
% |
|
|
Operating expenses |
|
|
(1,168 |
) |
|
|
|
|
(1,468 |
) |
|
|
300 |
|
|
|
20 |
|
% |
|
|
Selling, general and administrative |
|
|
(388 |
) |
|
|
|
|
(352 |
) |
|
|
(36 |
) |
|
|
(10 |
) |
% |
|
|
Depreciation and amortization |
|
|
(68 |
) |
|
|
|
|
(50 |
) |
|
|
(18 |
) |
|
|
(36 |
) |
% |
|
|
Impairment and restructuring charges |
|
|
(35 |
) |
|
|
|
|
(9 |
) |
|
|
(26 |
) |
|
** |
|
|
|
|
|
Interest expense |
|
|
(99 |
) |
|
|
|
|
(90 |
) |
|
|
(9 |
) |
|
|
(10 |
) |
% |
|
|
Interest income |
|
|
1 |
|
|
|
|
|
17 |
|
|
|
(16 |
) |
|
|
(94 |
) |
% |
|
|
Other, net |
|
|
519 |
|
|
|
|
|
(15 |
) |
|
|
534 |
|
|
** |
|
|
|
|
|
Income before income tax expense |
|
|
1,479 |
|
|
|
|
|
700 |
|
|
|
779 |
|
|
** |
|
|
|
|
|
Income tax expense |
|
|
(362 |
) |
|
|
|
|
(187 |
) |
|
|
(175 |
) |
|
|
(94 |
) |
% |
|
|
Net income |
|
|
1,117 |
|
|
|
|
|
513 |
|
|
|
604 |
|
|
** |
|
|
|
|
|
Less: Net income attributable to noncontrolling interests |
|
|
(11 |
) |
|
|
|
|
(14 |
) |
|
|
3 |
|
|
|
21 |
|
% |
|
|
Net income attributable to Fox Corporation stockholders |
|
$ |
1,106 |
|
|
|
|
$ |
499 |
|
|
$ |
607 |
|
|
** |
|
|
|
|
|
** |
not meaningful |
Overview—The Company’s revenues increased 2% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, due to higher affiliate fee revenue, partially offset by lower advertising and other revenues. The increase in affiliate fee revenue was primarily attributable to higher average rates per subscriber across all networks, led by contractual rate increases from affiliate agreement renewals and on existing affiliate agreements. The decrease in advertising revenue was primarily due to fewer broadcasts of NFL programming and the postponement of college football games and certain original scripted programming at the FOX Network as a result of COVID-19, partially offset by higher political advertising revenue related to the 2020 presidential and congressional elections and the impact of the consolidation of Tubi. The decrease in other revenues was primarily due to lower sports sublicensing revenue related to college sports as a result of COVID-19, lower digital content licensing revenue at the FOX Network and the absence of revenues generated from Premier Boxing Champions (“PBC”) pay-per-view events at FS1, partially offset by the impact of the consolidation of Credible in fiscal 2020.
Operating expenses decreased 20% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to lower sports programming rights amortization and production costs, including the broadcast of fewer NFL and college football games, and lower entertainment programming rights amortization and advertising and promotion costs due to fewer hours of original scripted programming as a result of COVID-19, partially offset by the consolidation of Tubi in fiscal 2020.
Selling, general and administrative expenses increased 10% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to the impact of acquisitions that occurred in fiscal 2020 (the “Fiscal 2020 Acquisitions”) (See Note 3—Acquisitions, Disposals and Other Transactions in the 2020 Form 10-K under the heading “Acquisitions and Disposals” for additional information).
20
Depreciation and amortization—Depreciation and amortization expense increased 36% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to the Fiscal 2020 Acquisitions.
Impairment and restructuring charges—Impairment and restructuring charges increased $26 million for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to higher severance costs principally at the Cable Network Programming segment (See Note 11—Additional Financial Information to the accompanying Financial Statements).
Interest expense—Interest expense increased 10% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to the issuance of $1.2 billion of senior notes in April 2020 (See Note 9—Borrowings in the 2020 Form 10-K under the heading “Public Debt – Senior Notes Issued” for additional information).
Interest income—Interest income decreased for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to lower interest rates.
Other, net—See Note 11—Additional Financial Information to the accompanying Financial Statements under the heading “Other, net.”
Income tax expense—The Company’s tax provision and related effective tax rate of 24% for the three months ended September 30, 2020 was higher than the statutory rate of 21% primarily due to state taxes, partially offset by a benefit from the reduction of uncertain tax positions for state tax audits.
The Company’s tax provision and related effective tax rate of 27% for the three months ended September 30, 2019 was higher than the statutory rate of 21% primarily due to state taxes and other permanent items.
Net income—Net income increased $604 million for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to the receipt of the $462 million reimbursement from Disney related to the Divestiture Tax (See Note 1—Description of Business and Basis of Presentation to the accompanying Financial Statements for additional information) and higher Segment EBITDA (as defined below) at the Television and Cable Network Programming segments, partially offset by higher Income tax expense.
Segment Analysis
The Company’s operating segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measure is segment operating income before depreciation and amortization, or Segment EBITDA. Due to the integrated nature of these operating segments, estimates and judgments are made in allocating certain assets, revenues and expenses.
Segment EBITDA is defined as Revenues less Operating expenses and Selling, general and administrative expenses. Segment EBITDA does not include: Amortization of cable distribution investments, Depreciation and amortization, Impairment and restructuring charges, Interest expense, Interest income, Other, net and Income tax expense. Management believes that Segment EBITDA is an appropriate measure for evaluating the operating performance of the Company’s business segments because it is the primary measure used by the Company’s chief operating decision maker to evaluate the performance of and allocate resources to the Company’s businesses.
21
The following tables set forth the Company’s Revenues and Segment EBITDA for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019:
|
|
|
For the three months ended September 30, |
||||||||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
% Change |
|||||||
|
(in millions, except %) |
|
|
|
|
|
|
|
|
|
Better/(Worse) |
||||||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable Network Programming |
|
$ |
1,325 |
|
|
$ |
1,285 |
|
|
$ |
40 |
|
|
|
3 |
|
% |
|
|
Television |
|
|
1,350 |
|
|
|
1,356 |
|
|
|
(6 |
) |
|
|
- |
|
% |
|
|
Other, Corporate and Eliminations |
|
|
42 |
|
|
|
26 |
|
|
|
16 |
|
|
|
62 |
|
% |
|
|
Total revenues |
|
$ |
2,717 |
|
|
$ |
2,667 |
|
|
$ |
50 |
|
|
|
2 |
|
% |
|
|
|
|
For the three months ended September 30, |
||||||||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
% Change |
|||||||
|
(in millions, except %) |
|
|
|
|
|
|
|
|
|
Better/(Worse) |
||||||||
|
Segment EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable Network Programming |
|
$ |
781 |
|
|
$ |
684 |
|
|
$ |
97 |
|
|
|
14 |
|
% |
|
|
Television |
|
|
457 |
|
|
|
251 |
|
|
|
206 |
|
|
|
82 |
|
% |
|
|
Other, Corporate and Eliminations |
|
|
(72 |
) |
|
|
(79 |
) |
|
|
7 |
|
|
|
9 |
|
% |
|
|
Adjusted EBITDA(a) |
|
$ |
1,166 |
|
|
$ |
856 |
|
|
$ |
310 |
|
|
|
36 |
|
% |
|
|
(a) |
For a discussion of Adjusted EBITDA and a reconciliation of Net income to Adjusted EBITDA, see “Non-GAAP Financial Measures” below. |
Cable Network Programming (49% and 48% of the Company’s revenues for the first three months of fiscal 2021 and 2020, respectively)
|
|
|
For the three months ended September 30, |
||||||||||||||||||
|
|
|
2020 |
|
|
|
|
2019 |
|
|
Change |
|
|
% Change |
|||||||
|
(in millions, except %) |
|
|
|
|
|
|
|
|
|
|
|
Better/(Worse) |
||||||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate fee |
|
$ |
973 |
|
|
|
|
$ |
939 |
|
|
$ |
34 |
|
|
|
4 |
|
% |
|
|
Advertising |
|
|
299 |
|
|
|
|
|
254 |
|
|
|
45 |
|
|
|
18 |
|
% |
|
|
Other |
|
|
53 |
|
|
|
|
|
92 |
|
|
|
(39 |
) |
|
|
(42 |
) |
% |
|
|
Total revenues |
|
|
1,325 |
|
|
|
|
|
1,285 |
|
|
|
40 |
|
|
|
3 |
|
% |
|
|
Operating expenses |
|
|
(434 |
) |
|
|
|
|
(520 |
) |
|
|
86 |
|
|
|
17 |
|
% |
|
|
Selling, general and administrative |
|
|
(115 |
) |
|
|
|
|
(90 |
) |
|
|
(25 |
) |
|
|
(28 |
) |
% |
|
|
Amortization of cable distribution investments |
|
|
5 |
|
|
|
|
|
9 |
|
|
|
(4 |
) |
|
|
(44 |
) |
% |
|
|
Segment EBITDA |
|
$ |
781 |
|
|
|
|
$ |
684 |
|
|
$ |
97 |
|
|
|
14 |
|
% |
|
Revenues at the Cable Network Programming segment increased 3% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, due to higher affiliate fee and advertising revenues, partially offset by lower other revenues. The increase in affiliate fee revenue was primarily attributable to higher average rates per subscriber, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals, partially offset by the impact of a lower average number of subscribers. The decrease in the average number of subscribers was due to a reduction in subscribers to traditional MVPDs, partially offset by an increase in digital MVPD subscribers. The increase in advertising revenue was primarily due to the 2020 presidential election which drove higher linear advertising revenue, including higher pricing and ratings, and digital advertising revenue at FOX News Media, partially offset by the broadcast of fewer live sports events, including college football, as a result of COVID-19. The decrease in other revenues was primarily attributable to lower sports sublicensing revenue and the absence of revenues generated from PBC pay-per-view events principally as a result of COVID-19, partially offset by higher revenues at FOX News Media.
Cable Network Programming Segment EBITDA increased 14% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, due to the revenue increases noted above and lower expenses. Operating expenses decreased for the three months ended September 30, 2020 primarily due to lower sports programming rights amortization and production costs driven by the postponement of live sports events, partially offset by the shift of National Association of Stock Car Auto Racing (“NASCAR”) Cup Series races and Major League Baseball
22
(“MLB”) regular season games into the first quarter of fiscal 2021 as a result of COVID-19. Selling, general and administrative expenses increased for the three months ended September 30, 2020 principally due to higher legal and marketing expenses at FOX News Media.
Television (50% and 51% of the Company’s revenues for the first three months of fiscal 2021 and 2020, respectively)
|
|
|
For the three months ended September 30, |
||||||||||||||||||
|
|
|
2020 |
|
|
|
|
2019 |
|
|
Change |
|
|
% Change |
|||||||
|
(in millions, except %) |
|
|
|
|
|
|
|
|
|
|
|
Better/(Worse) |
||||||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
670 |
|
|
|
|
$ |
787 |
|
|
$ |
(117 |
) |
|
|
(15 |
) |
% |
|
|
Affiliate fee |
|
|
560 |
|
|
|
|
|
455 |
|
|
|
105 |
|
|
|
23 |
|
% |
|
|
Other |
|
|
120 |
|
|
|
|
|
114 |
|
|
|
6 |
|
|
|
5 |
|
% |
|
|
Total revenues |
|
|
1,350 |
|
|
|
|
|
1,356 |
|
|
|
(6 |
) |
|
|
- |
|
% |
|
|
Operating expenses |
|
|
(714 |
) |
|
|
|
|
(943 |
) |
|
|
229 |
|
|
|
24 |
|
% |
|
|
Selling, general and administrative |
|
|
(179 |
) |
|
|
|
|
(162 |
) |
|
|
(17 |
) |
|
|
(10 |
) |
% |
|
|
Segment EBITDA |
|
$ |
457 |
|
|
|
|
$ |
251 |
|
|
$ |
206 |
|
|
|
82 |
|
% |
|
Revenues at the Television segment for the three months ended September 30, 2020 remained consistent, as compared to the corresponding period of fiscal 2020, as higher affiliate fee and other revenues were offset by lower advertising revenue. The decrease in advertising revenue was primarily due to fewer broadcasts of NFL programming, the postponement of college football games and certain original scripted programming at the FOX Network as a result of COVID-19 and the absence of the prior year broadcast of the 71st Annual Primetime Emmy Awards. Partially offsetting the decrease in advertising revenue was higher political advertising revenue related to the 2020 presidential and congressional elections at the FOX Television Stations and the impact of the consolidation of Tubi. The increase in affiliate fee revenue was primarily due to higher fees received from television stations that are affiliated with the FOX Network and higher average rates per subscriber, partially offset by a lower average number of subscribers, at the Company’s owned and operated television stations.
Television Segment EBITDA increased 82% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to lower expenses. Operating expenses decreased primarily due to lower sports programming rights amortization and production costs, including the broadcast of fewer NFL and college football games, and lower entertainment programming rights amortization and advertising and marketing costs due to fewer hours of original scripted programming as a result of COVID-19, partially offset by the impact of the consolidation of Tubi.
Other, Corporate and Eliminations (1% of the Company’s revenues for the first three months of fiscal 2021 and 2020)
|
|
|
For the three months ended September 30, |
||||||||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
% Change |
|||||||
|
(in millions, except %) |
|
|
|
|
|
|
|
|
|
Better/(Worse) |
||||||||
|
Revenues |
|
$ |
42 |
|
|
$ |
26 |
|
|
$ |
16 |
|
|
|
62 |
|
% |
|
|
Operating expenses |
|
|
(20 |
) |
|
|
(5 |
) |
|
|
(15 |
) |
|
** |
|
|
|
|
|
Selling, general and administrative |
|
|
(94 |
) |
|
|
(100 |
) |
|
|
6 |
|
|
|
6 |
|
% |
|
|
Segment EBITDA |
|
$ |
(72 |
) |
|
$ |
(79 |
) |
|
$ |
7 |
|
|
|
9 |
|
% |
|
|
** |
not meaningful |
Revenues at the Other, Corporate and Eliminations segment increased 62% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, primarily due to the impact of the consolidation of Credible. Operating expenses increased principally due to the impact of the consolidation of Credible. Selling, general and administrative expenses decreased primarily due to lower employee costs and professional fees, partially offset by the impact of the consolidation of Credible.
23
Non-GAAP Financial Measures
Adjusted EBITDA is defined as Revenues less Operating expenses and Selling, general and administrative expenses. Adjusted EBITDA does not include: Amortization of cable distribution investments, Depreciation and amortization, Impairment and restructuring charges, Interest expense, Interest income, Other, net and Income tax expense.
Management believes that information about Adjusted EBITDA assists all users of the Company’s Financial Statements by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect Net income, thus providing insight into both operations and the other factors that affect reported results. Adjusted EBITDA provides management, investors and equity analysts a measure to analyze the operating performance of the Company’s business and its enterprise value against historical data and competitors’ data, although historical results, including Adjusted EBITDA, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences and the impact of COVID-19 and other widespread health emergencies or pandemics and measures to contain their spread).
Adjusted EBITDA is considered a non-GAAP financial measure and should be considered in addition to, not as a substitute for, net income, cash flow and other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment charges, which are significant components in assessing the Company’s financial performance. Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
The following table reconciles Net income to Adjusted EBITDA for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019:
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Net income |
|
$ |
1,117 |
|
|
$ |
513 |
|
|
Add |
|
|
|
|
|
|
|
|
|
Amortization of cable distribution investments |
|
|
5 |
|
|
|
9 |
|
|
Depreciation and amortization |
|
|
68 |
|
|
|
50 |
|
|
Impairment and restructuring charges |
|
|
35 |
|
|
|
9 |
|
|
Interest expense |
|
|
99 |
|
|
|
90 |
|
|
Interest income |
|
|
(1 |
) |
|
|
(17 |
) |
|
Other, net |
|
|
(519 |
) |
|
|
15 |
|
|
Income tax expense |
|
|
362 |
|
|
|
187 |
|
|
Adjusted EBITDA |
|
$ |
1,166 |
|
|
$ |
856 |
|
The following table sets forth the computation of Adjusted EBITDA for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019:
|
|
|
For the three months ended September 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in millions) |
|
|||||
|
Revenues |
|
$ |
2,717 |
|
|
$ |
2,667 |
|
|
Operating expenses |
|
|
(1,168 |
) |
|
|
(1,468 |
) |
|
Selling, general and administrative |
|
|
(388 |
) |
|
|
(352 |
) |
|
Amortization of cable distribution investments |
|
|
5 |
|
|
|
9 |
|
|
Adjusted EBITDA |
|
$ |
1,166 |
|
|
$ |
856 |
|
24
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
The Company’s principal source of liquidity is internally generated funds which are highly dependent upon the continuation of affiliate agreements and the state of the advertising markets, the latter of which is being negatively impacted by the weak economic environment as a result of COVID-19. Depending on the duration and severity of the recession, it could lead to changes in consumer behavior, including increasing numbers of consumers canceling or foregoing subscriptions to MVPD services, that adversely affect the Company’s affiliate fee and advertising revenues. In addition, the Company’s business depends on the volume and popularity of the content it distributes, particularly sports content. Following the COVID-19 outbreak, sports events to which the Company has broadcast rights were cancelled or postponed and the production of certain entertainment content the Company distributes was suspended. If the Company experiences a recurrence of these disruptions, depending on their duration and severity, they could materially adversely affect the Company’s future advertising revenues and, over a longer period of time, its future affiliate fee revenues. The magnitude of the impact of the COVID-19 pandemic on the Company is highly uncertain and subject to change and will depend on evolving factors beyond the Company’s control. These include the duration and extent of the pandemic, increases or spikes in the number of cases, or future mutations or related strains of the virus; the duration and extent of the recession, the pace of economic recovery and the economic and operating conditions facing the Company and others in the pandemic’s aftermath; the effect of governmental actions; and potential changes in consumer behavior. As part of actions the Company is taking to address COVID-19 and the resulting impact on its business, operations and employees, in April 2020, the Company implemented short-term cost reductions, including reducing executive compensation and suspending compensation increases. The Company has approximately $5.1 billion of cash and cash equivalents as of September 30, 2020 and an unused five-year $1.0 billion unsecured revolving credit facility (See Note 5—Borrowings to the accompanying Financial Statements). The Company also has access to the worldwide capital markets, subject to market conditions which could be impacted by COVID-19. As of September 30, 2020, the Company was in compliance with all of the covenants under the revolving credit facility, and it does not anticipate any noncompliance with such covenants.
The principal uses of cash that affect the Company’s liquidity position include the following: the acquisition of rights and related payments for entertainment and sports programming; operational expenditures including production costs; marketing and promotional expenses; expenses related to broadcasting the Company’s programming along with the continued investment in establishing the Company’s standalone broadcast technical facilities following the Distribution (as defined in Note 1—Description of Business and Basis of Presentation in the 2020 Form 10-K under the heading “The Distribution”); employee and facility costs; capital expenditures; acquisitions; interest and dividend payments; debt repayments; and stock repurchases.
In addition to the acquisitions, sales and possible acquisitions disclosed elsewhere, the Company has evaluated, and expects to continue to evaluate, possible acquisitions and dispositions of certain businesses and assets. Such transactions may be material and may involve cash, the Company’s securities or the assumption of additional indebtedness.
Sources and Uses of Cash
Net cash provided by operating activities for the three months ended September 30, 2020 and 2019 was as follows (in millions):
|
For the three months ended September 30, |
|
2020 |
|
|
2019 |
|
||
|
Net cash provided by operating activities |
|
$ |
267 |
|
|
$ |
202 |
|
The increase in net cash provided by operating activities during the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, was primarily due to higher Segment EBITDA, partially offset by contractual increases for sports programming rights, higher inventory balances due to the postponement of certain sports events and higher tax payments.
25
Net cash used in investing activities for the three months ended September 30, 2020 and 2019 was as follows (in millions):
|
For the three months ended September 30, |
|
2020 |
|
|
2019 |
|
||
|
Net cash used in investing activities |
|
$ |
(149 |
) |
|
$ |
(40 |
) |
The increase in net cash used in investing activities during the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, was primarily due to payments related to investments in establishing the Company’s standalone broadcast technical facilities.
Net cash provided by (used in) financing activities for the three months ended September 30, 2020 and 2019 was as follows (in millions):
|
For the three months ended September 30, |
|
2020 |
|
|
2019 |
|
||
|
Net cash provided by (used in) financing activities |
|
$ |
298 |
|
|
$ |
(56 |
) |
The change in net cash provided by (used in) financing activities during the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020, was primarily due to the receipt of the $462 million reimbursement from Disney related to the Divesture Tax, partially offset by activity under the stock repurchase program.
Stock Repurchase Program
See Note 6—Stockholders’ Equity to the accompanying Financial Statements under the heading “Stock Repurchase Program.”
Dividends
The Company declared a semi-annual dividend of $0.23 per share on both the Class A Common Stock and the Class B Common Stock during the three months ended September 30, 2020, which was paid in October 2020 to stockholders of record on September 2, 2020.
Debt Instruments
Borrowings include senior notes (See Note 9—Borrowings to the 2020 Form 10-K under the heading “Public Debt – Senior Notes Issued”).
Ratings of the senior notes
The following table summarizes the Company’s credit ratings as of September 30, 2020:
|
Rating Agency |
|
Senior Debt |
|
Outlook |
|
Moody's |
|
Baa2 |
|
Stable |
|
Standard & Poor's |
|
BBB |
|
Stable |
Revolving Credit Agreement
The Company has an unused five-year $1.0 billion unsecured revolving credit facility with a maturity date of March 2024 (See Note 5—Borrowings to the accompanying Financial Statements).
Commitments and Contingencies
See Note 8—Commitments and Contingencies to the accompanying Financial Statements.
Recent Accounting Pronouncements
See Note 1—Description of Business and Basis of Presentation to the accompanying Financial Statements under the heading “Recently Adopted and Recently Issued Accounting Guidance.”
26
Caution Concerning Forward-Looking Statements
This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical or current fact are “forward-looking statements” for purposes of federal and state securities laws, including any statements regarding (i) future earnings, revenues or other measures of the Company’s financial performance; (ii) the Company’s plans, strategies and objectives for future operations; (iii) proposed new programming or other offerings; (iv) future economic conditions or performance; and (v) assumptions underlying any of the foregoing. Forward-looking statements may include, among others, the words “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “outlook” or any other similar words.
Although the Company’s management believes that the expectations reflected in any of the Company’s forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the SEC. Important factors that could cause the Company’s actual results, performance and achievements to differ materially from those estimates or projections contained in the Company’s forward-looking statements include, but are not limited to, government regulation, economic, strategic, political and social conditions and the following factors:
|
|
• |
the impact of COVID-19 and other widespread health emergencies or pandemics and measures to contain their spread and related weak macroeconomic conditions and increased market volatility; |
|
|
• |
the impact of COVID-19 specifically on the Company, including content disruptions that negatively affect the volume or popularity of the Company’s programming, particularly sports programming, and potential non-cash impairment charges resulting from significant declines in the Company’s estimated revenues or the expected popularity of the Company’s programming; |
|
|
• |
evolving technologies and distribution platforms and changes in consumer behavior as consumers seek more control over when, where and how they consume content, and related impacts on advertisers and traditional MVPDs; |
|
|
• |
declines in advertising expenditures due to various factors such as the economic prospects of advertisers or the economy in general, new technologies and distribution platforms and related changes in consumer behavior, and shifts in advertisers’ spending toward digital and mobile offerings and away from more traditional media; |
|
|
• |
the failure to enter into or renew on favorable terms, or at all, affiliation or carriage agreements or arrangements through which the Company makes its content available for viewing through online video platforms; |
|
|
• |
further declines in the number of subscribers to traditional MVPD services; |
|
|
• |
the highly competitive nature of the industry in which the Company’s businesses operate; |
|
|
• |
the popularity of the Company’s content, including special sports events; the continued popularity of the sports franchises, leagues and teams for which the Company has acquired programming rights; |
|
|
• |
the Company’s ability to renew programming rights, particularly sports programming rights, on sufficiently favorable terms, or at all; |
|
|
• |
damage to the Company’s brands or reputation; |
|
|
• |
the inability to realize the anticipated benefits of the Company’s strategic investments and acquisitions; |
|
|
• |
the failure to comply with laws, regulations, rules, industry standards or contractual obligations relating to privacy and personal data protection; |
|
|
• |
a degradation, failure or misuse of the Company’s network and information systems and other technology relied on by the Company that causes a disruption of services or improper disclosure of personal data or other confidential information; |
|
|
• |
content piracy and signal theft and the Company’s ability to protect its intellectual property rights; |
|
|
• |
the loss of key personnel; |
|
|
• |
labor disputes, including labor disputes involving professional sports leagues whose games or events the Company has the right to broadcast; |
27
|
|
• |
changes in tax, federal communications or other laws, regulations, practices or the interpretations thereof; |
|
|
• |
the impact of any investigations or fines from governmental authorities, including Federal Communications Commission (“FCC”) rules and policies and FCC decisions regarding revocation, renewal or grant of station licenses, waivers and other matters; |
|
|
• |
the failure or destruction of satellites or transmitter facilities the Company depends on to distribute its programming; |
|
|
• |
lower than expected valuations associated with one of the Company’s reporting units, indefinite-lived intangible assets, investments or long-lived assets; |
|
|
• |
changes in GAAP or other applicable accounting standards and policies; |
|
|
• |
the Company’s limited operating history as a standalone, publicly traded company and the risk that the Company is unable to make, on a timely or cost-effective basis, the changes necessary to operate effectively as a standalone, publicly traded company; |
|
|
• |
increased costs in connection with the Company operating as a standalone, publicly traded company following the Distribution and the loss of synergies the Company enjoyed from operating as part of 21CF; |
|
|
• |
the Company’s reliance on 21CF to provide the Company various services during transition periods under transition services agreements with 21CF, including broadcast operations, sports production, information systems and technology, and other services, and the risks that 21CF does not properly provide the services under these agreements or that the Company is unable to provide or obtain such services following the applicable transition period (or during such transition period, if 21CF does not properly provide them in a timely and cost effective manner); |
|
|
• |
the Company’s ability to secure additional capital on acceptable terms; |
|
|
• |
the impact of any payments the Company is required to make or liabilities it is required to assume under the Separation Agreement (as defined in Note 1—Description of Business and Basis of Presentation in the 2020 Form 10-K) and the indemnification arrangements entered into in connection with the Separation and the Distribution (as defined in Note 1—Description of Business and Basis of Presentation in the 2020 Form 10-K); and |
|
|
• |
the other risks and uncertainties detailed in Part I., Item 1A. “Risk Factors” in the 2020 Form 10-K. |
Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents that are incorporated by reference hereto speak only as of the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement made herein or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or to conform such statements to actual results or changes in our expectations, except as required by law.
28
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in the market risks reported in the 2020 Form 10-K.
|
ITEM 4. |
CONTROLS AND PROCEDURES |
|
|
(a) |
Disclosure Controls and Procedures |
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
|
|
(b) |
Changes in Internal Control over Financial Reporting |
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s first quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Due to the COVID-19 pandemic, most of the Company’s employees continue to work remotely, and the Company has strived to minimize the impact of this on the design and effectiveness of the Company’s internal control over financial reporting. The Company is continually monitoring and assessing its internal control over financial reporting and has not experienced any material impact to its internal control over financial reporting due to the COVID-19 pandemic.
29
PART II
|
ITEM 1. |
LEGAL PROCEEDINGS |
There have been no material changes to the Company’s legal proceedings described in the section titled “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 as filed with the Securities and Exchange Commission on August 10, 2020 (the “2020 Form 10-K”).
|
ITEM 1A. |
RISK FACTORS |
There have been no material changes to the risk factors described in the section titled “Risk Factors” in the 2020 Form 10-K.
|
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Below is a summary of the Company’s repurchases of its Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”), and Class B Common Stock, par value $0.01 per share (the “Class B Common Stock” and, together with the Class A Common Stock, the “Common Stock”), during the three months ended September 30, 2020:
|
|
|
Total number of shares purchased(a) |
|
|
Average price paid per share(b) |
|
|
Approximate dollar value of shares that may yet be purchased under the program(b)(c) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
July 1, 2020 – July 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
Class B common stock |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
August 1, 2020 – August 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock(d) |
|
|
5,821,538 |
|
|
|
27.23 |
|
|
|
|
|
|
Class B common stock(d) |
|
|
2,322,772 |
|
|
|
27.44 |
|
|
|
|
|
|
September 1, 2020 – September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock(d) |
|
|
1,223,992 |
|
|
|
27.40 |
|
|
|
|
|
|
Class B common stock(d) |
|
|
516,197 |
|
|
|
27.49 |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock(d) |
|
|
7,045,530 |
|
|
|
27.26 |
|
|
|
|
|
|
Class B common stock(d) |
|
|
2,838,969 |
|
|
|
27.45 |
|
|
|
|
|
|
|
|
|
9,884,499 |
|
|
|
|
|
|
$ |
1,130 |
|
|
(a) |
The Company has not made any purchases of Common Stock other than in connection with the publicly announced stock repurchase program described below. |
|
(b) |
These amounts exclude any fees, commissions or other costs associated with the share repurchases. |
|
(c) |
On November 6, 2019, the Company announced that its Board of Directors had authorized a stock repurchase program providing for the repurchase of $2 billion of the Company’s Common Stock. The program has no time limit and may be modified, suspended or discontinued at any time. |
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(d) |
In connection with the stock repurchase program, the Company entered into two accelerated share repurchase (“ASR”) agreements to repurchase $154 million of Class A Common Stock and $66 million of Class B Common Stock in August 2020. In accordance with the ASR agreements, in August 2020, the Company paid a third-party financial institution $154 million and $66 million and received initial deliveries of approximately 4.7 million and 2.0 million shares of Class A Common Stock and Class B Common Stock, respectively, representing 80% of the shares expected to be repurchased under each ASR agreement, at a price of $26.00 and $26.01 per share, respectively. Upon settlement of the ASR agreements in September 2020, the Company received final deliveries of approximately 0.9 million and 0.4 million shares of Class A Common Stock and Class B Common Stock, respectively. The final number of shares purchased under the ASR agreements was determined using a price of $27.57 and $27.67 per share (the volume-weighted average market price of the Class A Common Stock and Class B Common Stock, respectively, during the terms of the ASR agreements less a discount applicable for the Class A Common Stock) (See Note 6—Stockholders’ Equity to the accompanying Unaudited Consolidated Financial Statements of FOX under the heading “Stock Repurchase Program” for more information). |
30
In total, the Company repurchased approximately 10 million shares of Common Stock for $270 million during the three months ended September 30, 2020.
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ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
Not applicable
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ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable
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ITEM 5. |
OTHER INFORMATION |
Not applicable
31
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ITEM 6. |
EXHIBITS |
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(a) |
Exhibits. |
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31.1 |
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31.2 |
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32.1 |
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101 |
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The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019; (ii) Unaudited Consolidated Statements of Comprehensive Income for the three months ended September 30, 2020 and 2019; (iii) Consolidated Balance Sheets as of September 30, 2020 (unaudited) and June 30, 2020 (audited); (iv) Unaudited Consolidated Statements of Cash Flows for the three months ended September 30, 2020 and 2019; (v) Unaudited Consolidated Statements of Equity for the three months ended September 30, 2020 and 2019; and (vi) Notes to the Unaudited Consolidated Financial Statements.* |
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104 |
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Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
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* |
Filed herewith. |
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** |
Furnished herewith. |
32
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Fox Corporation |
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(Registrant) |
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By: |
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/s/ Steven Tomsic |
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Steven Tomsic |
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Chief Financial Officer |
Date: November 3, 2020
33
Exhibit 31.1
Chief Executive Officer Certification
Required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended
I, Lachlan K. Murdoch, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Fox Corporation; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
November 3, 2020
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By: |
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/s/ Lachlan K. Murdoch |
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Lachlan K. Murdoch |
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Chief Executive Officer |
Exhibit 31.2
Chief Financial Officer Certification
Required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended
I, Steven Tomsic, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Fox Corporation; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
November 3, 2020
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By: |
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/s/ Steven Tomsic |
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Steven Tomsic |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Fox Corporation on Form 10-Q for the fiscal quarter ended September 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, the undersigned officers of Fox Corporation, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Fox Corporation. |
November 3, 2020
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By: |
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/s/ Lachlan K. Murdoch |
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Lachlan K. Murdoch |
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Chief Executive Officer |
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By: |
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/s/ Steven Tomsic |
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Steven Tomsic |
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Chief Financial Officer |