The accompanying notes are an integral part of these Unaudited Consolidated and Combined Financial Statements.
The accompanying notes are an integral part of these Unaudited Consolidated and Combined Financial Statements.
The accompanying notes are an integral part of these Unaudited Consolidated and Combined Financial Statements.
The accompanying notes are an integral part of these Unaudited Consolidated and Combined Financial Statements.
The accompanying notes are an integral part of these Unaudited Consolidated and Combined Financial Statements.
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Fox Corporation, a Delaware corporation (“FOX” or the “Company”), is a news, sports and entertainment company, which manages and reports its businesses in the following segments: Cable Network Programming, Television and Other, Corporate and Eliminations.
The Distribution
On March 19, 2019, the Company became a standalone publicly traded company through the pro rata distribution by Twenty-First Century Fox, Inc. (now known as TFCF Corporation) (“21CF”) of all of the issued and outstanding common stock of FOX to 21CF stockholders (other than holders that were subsidiaries of 21CF) (the “Distribution”) in accordance with the Amended and Restated Distribution Agreement and Plan of Merger, dated as of June 20, 2018, by and between 21CF and 21CF Distribution Merger Sub, Inc. Following the Distribution, 354 million and 266 million shares of the Company’s 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”), respectively, began trading independently on The Nasdaq Global Select Market. In connection with the Distribution, the Company entered into the Separation and Distribution Agreement, dated as of March 19, 2019 (the “Separation Agreement”), with 21CF, which effected the internal restructuring (the “Separation”) whereby 21CF transferred to FOX a portfolio of 21CF’s news, sports and broadcast businesses, including FOX News Media (consisting of FOX News and FOX Business), FOX Entertainment, FOX Sports, FOX Television Stations, and sports cable networks FS1, FS2, FOX Deportes and Big Ten Network, and certain other assets, and FOX assumed from 21CF the liabilities associated with such businesses and certain other liabilities. The Separation and the Distribution were effected as part of a series of transactions contemplated by the Amended and Restated Merger Agreement and Plan of Merger, dated as of June 20, 2018, by and among 21CF, The Walt Disney Company (“Disney”) and certain subsidiaries of Disney, pursuant to which, among other things, 21CF became a wholly-owned subsidiary of Disney.
In connection with the Separation, the Company entered into several agreements that govern certain aspects of the Company’s relationship with 21CF and Disney following the Separation. These include the Separation Agreement, a tax matters agreement, a transition services agreement, as well as agreements relating to intellectual property licenses, employee matters, commercial arrangements and a studio lot lease (See Note 1—Description of Business and Basis of Presentation in the 2019 Form 10-K, as defined below, for further discussion).
Basis of Presentation
The Unaudited Consolidated and Combined 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 and Combined Financial Statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020.
These interim Unaudited Consolidated and Combined 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, 2019 as filed with the Securities and Exchange Commission (the “SEC”) on August 9, 2019 (the “2019 Form 10-K”).
The Company became a separate consolidated group as a result of the Distribution, and the Company’s financial statements for the three months ended September 30, 2019 and as of September 30, 2019 and June 30, 2019 are presented on a consolidated basis. Prior to the Distribution, the Company’s Unaudited Combined Financial Statements were derived from the unaudited consolidated financial statements and accounting records of 21CF. The Company’s financial statements for the three months ended September 30, 2018 are presented on a combined basis as the Company was not a separate consolidated group prior to the Distribution. These financial statements reflect the combined historical results of operations and cash flows of 21CF’s domestic news, national sports and broadcast businesses and certain other assets and liabilities associated with such businesses.
6
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The Unaudited Combined Statement of Operations for the three months ended September 30, 2018 includes allocations for certain support functions that were provided on a centralized basis within 21CF prior to the Distribution and not recorded at the business unit level, such as certain expenses related to finance, legal, insurance, information technology, compliance and human resources management activities, among others. 21CF did not routinely allocate these costs to any of its business units. These expenses have been allocated to FOX on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of combined revenues, headcount or other relevant measures. Management believes the assumptions underlying the Unaudited Combined Financial Statements, including the assumptions regarding allocating general corporate expenses from 21CF, are reasonable. Nevertheless, the Unaudited Combined Financial Statements may not include all of the actual expenses that would have been incurred by FOX and may not reflect FOX’s consolidated results of operations and cash flows had it been a standalone company during the period presented. Actual costs that would have been incurred if FOX had been a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.
For purposes of the Company’s financial statements for the period prior to the Distribution, the income tax provision in the Unaudited Combined Statement of Operations was calculated as if FOX filed a separate tax return and was operating as a standalone business. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of FOX’s actual tax balances prior to or subsequent to the Distribution. Prior to the Distribution, the Company’s operating results were included in 21CF’s consolidated U.S. federal and state income tax returns.
Intercompany transactions with 21CF or its affiliates and the Company are reflected in the historical Unaudited Combined Financial Statements for the period prior to the Distribution. All significant intracompany transactions and accounts within the Company’s consolidated and combined 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 is generally presumed to exist when the Company owns an interest between 20% and 50% and exercises significant influence. 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 and Combined Statements of Operations.
The preparation of the Company’s Unaudited Consolidated and Combined Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the Unaudited Consolidated and Combined Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.
The Company’s fiscal year ends on June 30 of each year. Certain fiscal 2019 amounts have been reclassified to conform to the fiscal 2020 presentation.
The unaudited and audited consolidated and combined financial statements are referred to as the “Financial Statements” herein. The unaudited consolidated and combined 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.
7
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Recently Adopted and Recently Issued Accounting Guidance
Adopted
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (“Topic 842”), as amended. Topic 842 requires recognition of lease liabilities and right-of-use (“ROU”) assets on the balance sheet and disclosure of key information about leasing arrangements. On July 1, 2019, the Company adopted Topic 842 on a modified retrospective basis and recorded operating lease liabilities and ROU assets of approximately $635 million and $585 million, respectively, at the date of adoption (See Note 6—Leases). The difference between the Company’s initial recognition of operating lease liabilities and ROU assets, at the date of adoption, was primarily a result of the reclassification of the deferred rent liability. The adoption of Topic 842 did not have a significant impact on the Statements of Operations. In accordance with the guidance in Topic 842, the Company elected not to reassess (i) whether any existing contracts are or contain leases, (ii) lease classification for existing leases or (iii) capitalization of initial direct costs for existing leases.
NOTE 2. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS
The Stars Group
In May 2019, the Company and The Stars Group Inc. (“The Stars Group”) announced plans to launch FOX Bet, a national media and sports wagering partnership in the U.S., which was launched in the first quarter of fiscal 2020. FOX Sports and The Stars Group have entered into a long-term commercial arrangement through which FOX Sports provides The Stars Group with an exclusive license to use certain FOX Sports trademarks. Prior to the tenth anniversary of the commercial agreement, and subject to certain conditions and applicable gaming regulatory approvals, FOX Sports has an option to acquire up to 50% of the equity in The Stars Group’s U.S. business. In addition, the Company invested $236 million to acquire a 4.99% equity interest in The Stars Group. The common shares issued to the Company are subject to certain transfer restrictions for a period ending in May 2021, subject to customary exceptions. The Company accounts for the investment in The Stars Group at fair value (See Note 4—Fair Value).
Caffeine and Caffeine Studios
In the first quarter of fiscal 2019, the Company invested, in the aggregate, approximately $100 million in cash for a minority equity interest in Caffeine, Inc. (“Caffeine”), a social broadcasting platform for gaming, entertainment and other creative content, and Caffeine Studio, LLC (“Caffeine Studios”), a newly formed venture that is jointly owned by the Company and Caffeine. The Company accounts for the investments in Caffeine using the measurement alternative in accordance with ASC 321 and Caffeine Studios using the equity method.
NOTE 3. INVENTORIES, NET
The Company’s inventories were comprised of the following:
|
|
As of
September 30,
2019
|
|
|
As of
June 30,
2019
|
|
|
|
(in millions)
|
|
Sports programming rights
|
|
$
|
1,258
|
|
|
$
|
954
|
|
Entertainment programming rights
|
|
|
413
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
|
1,671
|
|
|
|
1,334
|
|
Less: current portion of inventories, net
|
|
|
(1,463
|
)
|
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current inventories, net
|
|
$
|
208
|
|
|
$
|
205
|
|
NOTE 4. FAIR VALUE
In accordance with ASC 820, “Fair Value Measurement,” fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories: (i) inputs that are quoted prices in active markets (“Level 1”); (ii) inputs other than quoted prices included within Level 1 that are observable, including quoted prices for similar assets or liabilities (“Level 2”); and (iii) inputs that require the entity to use its own assumptions about market participant assumptions (“Level 3”).
8
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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, 2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in millions)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(a)
|
|
$
|
804
|
|
|
$
|
613
|
|
|
$
|
191
|
|
|
$
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration(b)
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
Redeemable noncontrolling interests(b)
|
|
|
(207
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
591
|
|
|
$
|
613
|
|
|
$
|
191
|
|
|
$
|
(213
|
)
|
|
|
Fair value measurements
|
|
|
|
As of June 30, 2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in millions)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(a)
|
|
$
|
761
|
|
|
$
|
545
|
|
|
$
|
216
|
|
|
$
|
-
|
|
Redeemable noncontrolling interests(b)
|
|
|
(189
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
572
|
|
|
$
|
545
|
|
|
$
|
216
|
|
|
$
|
(189
|
)
|
(a)
|
The investment categorized as Level 1 represents an investment in equity securities of Roku, Inc. (“Roku”) with a readily determinable fair value. The investment categorized as Level 2 represents an investment in equity securities of The Stars Group estimated using the quoted market price of The Stars Group common stock less a discount due to a lack of marketability (“DLOM”). The DLOM was derived based on the remaining term of the lock up period and the volatility of The Stars Group common stock (See Note 2—Acquisitions, Disposals and Other Transactions under the heading “The Stars Group” for further discussion).
|
(b)
|
The Company utilizes the market approach valuation technique for its Level 3 fair value measures. Inputs to such measures could include observable market data obtained from independent sources such as broker quotes and recent market transactions for similar assets. It is the Company’s policy to maximize the use of observable inputs in the measurement of its Level 3 fair value measurements. To the extent observable inputs are not available, the Company utilizes unobservable inputs based upon the assumptions market participants would use in valuing the liability. Examples of utilized unobservable inputs are future cash flows and long-term growth rates.
|
Redeemable Noncontrolling Interests
The Company accounts for redeemable noncontrolling interests in accordance with ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity”, because their exercise is outside the control of the Company. The redeemable noncontrolling interests recorded at fair value are put rights held by the minority shareholder in one of the Company’s majority-owned sports networks.
9
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The changes in redeemable noncontrolling interests classified as Level 3 measurements were as follows:
|
|
For the three months ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in millions)
|
Beginning of period
|
|
$
|
(189
|
)
|
|
$
|
(275
|
)
|
|
Net income
|
|
|
(9
|
)
|
|
|
(11
|
)
|
|
Distributions
|
|
|
8
|
|
|
|
13
|
|
|
Accretion and other
|
|
|
(17
|
)
|
|
|
190
|
|
(a)
|
|
|
|
|
|
|
|
-
|
|
|
End of period
|
|
$
|
(207
|
)
|
|
$
|
(83
|
)
|
|
(a)
|
As a result of the expiration of a portion of the minority shareholder’s put right, approximately $200 million was reclassified into equity.
|
As of September 30, 2019, a portion of the minority shareholder’s put right was exercisable. In October 2019, this portion of the minority shareholder’s put right expired and, as a result, approximately $120 million will be reclassified into equity in the Company’s consolidated financial statements for the three months ending December 31, 2019.
Another portion of the minority shareholder’s put right will become exercisable in July 2020 and the remaining portion will become exercisable in July 2021.
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,
2019
|
|
|
As of
June 30,
2019
|
|
|
|
(in millions)
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
7,889
|
|
|
$
|
7,643
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
6,752
|
|
|
$
|
6,751
|
|
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.
Generally, the Company does not require collateral to secure receivables. As of September 30, 2019, the Company had one customer that accounted for approximately 10% of the Company’s receivables. As of June 30, 2019, the Company had no individual customers that accounted for 10% or more of the Company’s receivables.
NOTE 5. BORROWINGS
Borrowings include senior notes (See Note 9—Borrowings in the 2019 Form 10-K under the heading “Senior Notes Issued Under the January 2019 Indenture”). In addition, the Company is party to a credit agreement providing a $1.0 billion unsecured revolving credit facility with a sub-limit of $150 million available for the issuance of letters of credit and a maturity date of March 2024 (See Note 9—Borrowings in the 2019 Form 10-K under the heading “Revolving Credit Agreement”). As of September 30, 2019, there were no borrowings outstanding under the revolving credit agreement.
10
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 6. LEASES
Lessee Arrangements
The Company has lease agreements primarily for office facilities, transponder agreements and other equipment leases. At contract inception, the Company determines if a contract is or contains a lease and whether it is an operating or finance lease. The Company does not separate lease components from nonlease components for real estate leases.
For operating leases that have a lease term of greater than one year, the Company initially recognizes operating lease liabilities and ROU assets at the lease commencement date, which is the date that the lessor makes an underlying asset available for use by the Company. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the present value of the Company’s obligation to make lease payments, primarily escalating fixed payments, over the lease term. The discount rate used to determine the present value of the lease payments is generally the Company’s incremental borrowing rate because the rate implicit in the lease is generally not readily determinable. The incremental borrowing rate for the lease term is determined by adjusting the Company’s unsecured borrowing rate for a similar term to approximate a collateralized borrowing rate. The Company's lease terms for each of its leases represents the noncancelable period for which the Company has the right to use an underlying asset, together with all of the following: (i) periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option; (ii) periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option; and (iii) periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor. The Company recognizes lease payments as lease expense on a straight-line basis over the lease term.
The Company’s operating ROU assets are included in Other non-current assets and the Company’s current and non-current operating lease liabilities are included in Accounts payable, accrued expenses and other current liabilities and Other liabilities, respectively, in the Company’s Balance Sheet (See Note 12—Additional Financial Information).
The following amounts were recorded in the Company’s Balance Sheet relating to its operating leases and other supplemental information:
|
As of September 30, 2019
|
|
|
(in millions)
|
|
ROU assets
|
$
|
560
|
|
Lease liabilities
|
|
|
|
Current lease liabilities
|
$
|
145
|
|
Non-current lease liabilities
|
|
460
|
|
|
|
|
|
Total lease liabilities
|
$
|
605
|
|
Other supplemental information
|
|
|
|
Weighted average remaining lease term
|
7 years
|
|
Weighted average discount rate
|
|
3
|
%
|
The following table presents information about the Company’s lease costs and supplemental cash flows information for leases:
|
For the three months ended
September 30, 2019
|
|
|
(in millions)
|
|
Lease costs
|
|
|
|
Total lease costs(a)
|
$
|
30
|
|
Supplemental cash flows information
|
|
|
|
Operating cash flows from operating leases
|
$
|
38
|
|
(a)
|
Total lease costs of $30 million are net of sublease income of approximately $10 million.
|
11
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following table presents the lease payments relating to the Company’s operating leases:
|
As of September 30, 2019
|
|
|
(in millions)
|
|
Fiscal Year
|
|
|
|
2020
|
$
|
119
|
|
2021
|
|
123
|
|
2022
|
|
91
|
|
2023
|
|
86
|
|
2024
|
|
82
|
|
Thereafter
|
|
194
|
|
|
|
|
|
Total lease payments(a)
|
|
695
|
|
Less: imputed interest
|
|
(90
|
)
|
|
|
|
|
Present value of operating lease liabilities
|
$
|
605
|
|
(a)
|
In addition to the total lease payments presented above, the Company has a lease for an office facility with lease payments of approximately $55 million that has not yet commenced as of September 30, 2019.
|
Lessor Arrangements
The Company’s lessor arrangements primarily relate to its owned production and office facilities at the FOX Studios lot, which is located in Los Angeles, California. The Company is responsible for the management of the FOX Studios lot, which includes managing and providing facilities, studio operations, and production services, which until 2026 will predominantly be utilized by Disney productions. The Company leases production and office space on the FOX Studios lot to 21CF for an initial term of seven years, subject to two five-year renewal options exercisable by 21CF. The Company will receive approximately $50 million annually in lease payments over the lease term.
The Company recorded total lease income of approximately $15 million for the three months ended September 30, 2019 which is included in Revenues in the Statement of Operations. The Company recognizes lease payments for operating leases as revenue on a straight-line basis over the lease term and variable lease payments as revenue in the period incurred.
NOTE 7. EQUITY-BASED COMPENSATION
In connection with the Distribution, the Company adopted the Fox Corporation 2019 Shareholder Alignment Plan (the “SAP”), under which equity-based compensation, including stock options, stock appreciation rights, restricted and unrestricted stock, restricted stock units (“RSUs”), performance stock units (“PSUs”) and other types of FOX equity awards may be granted. The Company’s officers, directors and employees are eligible to participate in the SAP.
Performance Stock Units
PSUs are fair valued on the date of grant and expensed over the service period using a straight-line method as the awards cliff vest at the end of the three-year performance period. The Company also estimates the number of shares expected to vest which is based on management’s determination of the probable outcome of the performance conditions, which requires considerable judgment. The Company records a cumulative adjustment in periods that the Company’s estimate of the number of shares expected to vest changes. Additionally, the Company ultimately adjusts the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. The number of shares that will be issued upon vesting of PSUs can range from 0% to 200% of the target award, based on (i) the Company’s average annual adjusted earnings per share growth, (ii) the Company’s average annual adjusted free cash flow growth and (iii) the Company’s three-year total shareholder return (“TSR”) as measured against the three-year TSR of the companies that comprise the Standard and Poor’s 500 Index. The fair value of the TSR condition is determined using a Monte Carlo simulation model.
During the three months ended September 30, 2019, approximately 0.4 million PSUs were granted, which have a three-year performance measurement period beginning in July 2019. The awards are subject to the achievement of three pre-established objective performance measures determined by the Compensation Committee of the Company’s Board of
12
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Directors. The awards issued will be settled in shares of Class A Common Stock upon vesting and are subject to the participants’ continued employment with the Company. Any person who holds PSUs shall have no ownership interest in the shares of Class A Common Stock to which such PSUs relate until and unless shares of Class A Common Stock are delivered to the holder. All shares of Class A Common Stock awards that are cancelled or forfeited become available for future grants. Certain of these awards have a graded vesting provision and the expense recognition is accelerated.
Restricted Stock Units
During the three months ended September 30, 2019, approximately 0.3 million RSUs were granted, which vest in equal annual installments over a three-year period subject to the participants’ continued employment with the Company.
Stock Options
During the three months ended September 30, 2019, approximately 1.1 million stock options were granted, which have a term of seven years and vest in equal annual installments over a three-year period subject to the participants’ continued employment with the Company. As of September 30, 2019, the Company had approximately 4 million stock options outstanding. Because the stock options’ exercise price was greater than the average market price of the Class A Common Stock for the three months ended September 30, 2019, they were not included in the computation of diluted earnings per share.
The following table summarizes the Company’s equity-based compensation:
|
|
For the three months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Equity-based compensation(a)
|
|
$
|
32
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of all settled equity-based awards
|
|
$
|
3
|
|
|
$
|
102
|
|
(a)
|
Prior to the Distribution, equity-based compensation included allocated expense for both executive directors and corporate executives of 21CF, allocated using a proportional allocation driver, which management deemed to be reasonable.
|
The Company’s stock based awards are settled in Class A Common Stock. As of September 30, 2019, the Company’s total estimated compensation cost, not yet recognized, related to non-vested equity awards held by the Company’s employees was approximately $180 million and is expected to be recognized over a weighted average period between one and two years.
NOTE 8. RELATED PARTY TRANSACTIONS AND TWENTY-FIRST CENTURY FOX, INC. INVESTMENT
Related Party Transactions
In the ordinary course of business, the Company enters into transactions with related parties, which prior to the Distribution included subsidiaries and equity affiliates of 21CF.
The following table sets forth the net revenue from related parties included in the Statement of Operations for the three months ended September 30, 2018:
|
For the three months ended September 30, 2018
|
|
|
(in millions)
|
|
Related party revenue
|
$
|
71
|
|
Related party expense
|
|
(31
|
)
|
|
|
|
|
Related party revenue, net of expense
|
$
|
40
|
|
For the three months ended September 30, 2019, the related party revenue and expense were not material.
13
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Corporate Allocations and Twenty-First Century Fox, Inc. Investment
Prior to the Distribution, 21CF provided services to and funded certain expenses for the Company such as: global real estate and occupancy costs and employee benefits (“Direct Corporate Expenses”). In addition, the Company’s Unaudited Combined Financial Statements include general corporate expenses of 21CF which were not historically allocated to the Company for certain support functions that were provided on a centralized basis within 21CF and not recorded at the business unit level, such as certain expenses related to finance, legal, insurance, information technology, compliance and human resources management activities, among others (“General Corporate Expenses”). For purposes of the Unaudited Combined Financial Statements for the three months ended September 30, 2018, the General Corporate Expenses have been allocated to the Company. The General Corporate Expenses are included in the Unaudited Combined Statement of Operations in Selling, general and administrative expenses and Other, net, as appropriate. These expenses have been allocated to the Company on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of combined revenues, headcount or other relevant measures of the Company. Management believes the assumptions underlying the Unaudited Combined Financial Statements, including the assumptions regarding allocating General Corporate Expenses from 21CF are reasonable. Nevertheless, the Unaudited Combined Financial Statements may not include all of the actual expenses that would have been incurred by FOX and may not reflect the Company’s consolidated results of operations and cash flows had it been a standalone company prior to the Distribution. Actual costs that would have been incurred if the Company had been a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. For the purposes of the Unaudited Combined Statement of Operations, the Company recorded approximately $75 million of General Corporate Expenses within Selling, general and administrative expenses and the remaining balance of the Corporate allocations presented in the table below within Other, net for the three months ended September 30, 2018.
Intercompany transactions with 21CF or its affiliates and the Company are reflected in the historical Unaudited Combined Financial Statements for the period prior to the Distribution. All significant intercompany balances between 21CF and the Company, for the period prior to the Distribution, have been reflected in the Unaudited Combined Statement of Cash Flows as a financing activity.
The following table summarizes the components of the net increase in the Twenty-First Century Fox, Inc. investment for the three months ended September 30, 2018:
|
For the three months ended September 30, 2018
|
|
|
(in millions)
|
|
Cash pooling, general financing activities and other(a)
|
$
|
580
|
|
Corporate allocations
|
|
85
|
|
|
|
|
|
Net increase in Twenty-First Century Fox, Inc. investment
|
$
|
665
|
|
(a)
|
The nature of activities included in the line item ‘Cash pooling, general financing activities and other’ includes financing activities, capital transfers, cash sweeps, other treasury services and Direct Corporate Expenses.
|
NOTE 9. 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, 2019 and June 30, 2019 were approximately $40 billion and $41 billion, respectively. The decrease from June 30, 2019 was primarily due to sports programming rights payments.
The commitments above do not include obligations and commitments related to the transactions disclosed in Note 13—Subsequent Events.
14
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Contingencies
Profits Participants Litigation
In November 2015, Wark Entertainment, Inc., Temperance Brennan, L.P., Snooker Doodle Productions, Inc., and Bertha Blue, Inc. filed lawsuits against 21CF, Fox Entertainment Group, Twentieth Century Fox Film Corporation, Twentieth Century Fox Television (“TCFTV”), and Fox Broadcasting Corporation in Superior Court of Los Angeles. The plaintiffs are profits participants in the Bones television series and alleged that TCFTV, which produced the show, breached its contracts with the plaintiffs and committed fraud concerning certain of those contracts, and that 21CF, Fox Entertainment Group, and Fox Broadcasting Corporation induced TCFTV’s breach of contract and intentionally interfered with the plaintiffs’ contracts with TCFTV. As of September 30, 2019, the parties have amicably resolved the lawsuits, and the Company has contributed $34 million pursuant to a settlement agreement with the plaintiffs and The Walt Disney Company as successor to 21CF, Fox Entertainment Group, Twentieth Century Fox Film Corporation, and TCFTV.
Profits participation litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases that could involve a FOX subsidiary. As of September 30, 2019, the Company does not believe that it has incurred a probable material loss for any other activities.
FOX News
The Company and certain of its current and former employees have been subject to allegations of sexual harassment and discrimination and racial discrimination relating to alleged misconduct at the Company’s FOX News business. 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 individually or in the aggregate, material to the Company. The amount of 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, 21CF agreed to indemnify News Corporation, on an after-tax basis, for payments made after the 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, 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, certain costs and liabilities related to the U.K. Newspaper Matters Indemnity were assumed by the Company. The liability recorded in the Balance Sheets related to the indemnity was approximately $50 million as of September 30, 2019 and June 30, 2019.
Other
The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters. 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) 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
15
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 10. 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 $14 million and $13 million for the three months ended September 30, 2019 and 2018, respectively.
NOTE 11. 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 28 full power broadcast television stations, including 11 duopolies, in the U.S. Of these stations, 17 are affiliated with the FOX Network, 10 are affiliated with MyNetworkTV and one is an independent station.
|
|
•
|
Other, Corporate and Eliminations, which principally consists of corporate overhead costs, intracompany eliminations and the FOX Studios lot. The FOX Studios 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.
|
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.
Beginning with the announcement of the Company’s financial results for the third quarter of fiscal 2019, the Company has renamed as “Segment EBITDA” the measure that it previously referred to as “Segment OIBDA”. The definition of this measure has not changed: 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.
16
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following tables set forth the Company’s Revenues and Segment EBITDA for the three months ended September 30, 2019 and 2018:
|
|
For the three months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Cable Network Programming
|
|
$
|
1,285
|
|
|
$
|
1,265
|
|
Television
|
|
|
1,356
|
|
|
|
1,277
|
|
Other, Corporate and Eliminations
|
|
|
26
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,667
|
|
|
$
|
2,541
|
|
Segment EBITDA
|
|
|
|
|
|
|
|
|
Cable Network Programming
|
|
$
|
684
|
|
|
$
|
633
|
|
Television
|
|
|
251
|
|
|
|
171
|
|
Other, Corporate and Eliminations
|
|
|
(79
|
)
|
|
|
(43
|
)
|
Amortization of cable distribution investments
|
|
|
(9
|
)
|
|
|
(10
|
)
|
Depreciation and amortization
|
|
|
(50
|
)
|
|
|
(43
|
)
|
Impairment and restructuring charges
|
|
|
(9
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(90
|
)
|
|
|
(16
|
)
|
Interest income
|
|
|
17
|
|
|
|
-
|
|
Other, net
|
|
|
(15
|
)
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
700
|
|
|
|
831
|
|
Income tax expense
|
|
|
(187
|
)
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
513
|
|
|
|
615
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(14
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to Fox Corporation stockholders
|
|
$
|
499
|
|
|
$
|
604
|
|
Revenues by Segment by Component
|
|
For the three months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Cable Network Programming
|
|
|
|
|
|
|
|
|
Affiliate fee
|
|
$
|
939
|
|
|
$
|
939
|
|
Advertising
|
|
|
254
|
|
|
|
264
|
|
Other
|
|
|
92
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Total Cable Network Programming revenues
|
|
|
1,285
|
|
|
|
1,265
|
|
Television
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
787
|
|
|
|
799
|
|
Affiliate fee
|
|
|
455
|
|
|
|
398
|
|
Other
|
|
|
114
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total Television revenues
|
|
|
1,356
|
|
|
|
1,277
|
|
Other, Corporate and Eliminations
|
|
|
26
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,667
|
|
|
$
|
2,541
|
|
17
FOX CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Future Performance Obligations
As of September 30, 2019, approximately $4.5 billion of revenues are expected to be recognized primarily over the next one to three years. The Company’s most significant remaining performance obligations relate to affiliate contracts and sports rights sublicensing contracts with fixed fees. The amount disclosed does not include (i) revenues related to performance obligations that are part of a contract whose original expected duration is one year or less, (ii) revenues that 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Cable Network Programming
|
|
$
|
13
|
|
|
$
|
11
|
|
Television
|
|
|
15
|
|
|
|
26
|
|
Other, Corporate and Eliminations
|
|
|
22
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
50
|
|
|
$
|
43
|
|
|
|
As of
September 30,
2019
|
|
|
As of
June 30,
2019
|
|
|
|
(in millions)
|
|
Assets
|
|
|
|
|
|
|
|
|
Cable Network Programming
|
|
$
|
2,642
|
|
|
$
|
2,584
|
|
Television
|
|
|
7,086
|
|
|
|
6,598
|
|
Other, Corporate and Eliminations
|
|
|
9,901
|
|
|
|
9,462
|
|
Investments
|
|
|
905
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,534
|
|
|
$
|
19,509
|
|