ITEM 1A. RISK FACTORS
Prospective investors should consider carefully the risk factors set forth below before making an investment in the Company’s securities.
Risks Related to Macroeconomic Conditions, Our Business and Our Industry
Changes in consumer behavior and evolving technologies and distribution platforms continue to challenge existing business models and may adversely affect the Company's business, financial condition or results of operations.
The ways in which consumers view content and technology and business models in our industry continue to rapidly evolve and new distribution platforms and increased competition from new entrants and emerging technologies have added to the complexity of maintaining predictable revenue streams. Technological advancements have driven changes in consumer behavior as consumers now have more control over when, where and how they consume content and have increased advertisers' options for reaching their target audiences. Consumer preferences have evolved towards SVOD and AVOD services and other direct-to-consumer offerings, and there has been a substantial increase in the availability of content with reduced advertising or without advertising at all. In addition, the increasing use of time-shifting and advertising-skipping technologies such as DVRs that enable viewers to fast-forward or circumvent advertisements impacts the attractiveness of the Company's programming to advertisers and may adversely affect our advertising revenues.
Changes in consumer behavior and technology have also had an adverse impact on MVPDs that deliver the Company's broadcast and cable networks to consumers. Consumers are increasingly turning to lower-cost alternatives, including direct-to-consumer offerings, which has contributed to industry-wide declines in subscribers to MVPD services over the last several years. These declines are expected to continue and possibly accelerate in the future. If consumers increasingly favor alternative offerings over MVPD subscriptions, the Company may continue to experience a decline in viewership and ultimately demand for the programming on its networks, which could lead to lower affiliate fee and advertising revenues. Changing distribution models may also negatively impact the Company's ability to negotiate affiliation agreements on favorable terms, which could have an adverse effect on our business, financial condition or results of operations. Our affiliate fee and advertising revenues also may be adversely affected by consumers' use of antennas (and their integration with set-top boxes or other consumer devices) to access broadcast signals to avoid subscriptions.
To remain competitive in this evolving environment, the Company must effectively anticipate and adapt to new market changes. The Company continues to focus on investing in and expanding its digital distribution offerings and direct engagement with consumers, including through Tubi, FOX Nation, FOX Weather and other offerings. However, if the Company fails to protect and exploit the value of its content while responding to, and developing new technology and business models to take advantage of, technological developments and consumer preferences, it could have a significant adverse effect on the Company's business, financial condition or results of operations.
Declines in advertising expenditures could cause the Company’s revenues and operating results to decline significantly in any given period or in specific markets.
The Company derives substantial revenues from the sale of advertising, and its ability to generate advertising revenues depends on a number of factors. The strength of the advertising market can fluctuate in response to the economic prospects of specific advertisers or industries, advertisers' spending priorities and the economy in general or the economy of an individual geographic market. In addition, pandemics (such as the COVID-19 pandemic) and other widespread health emergencies, natural and other disasters, acts of terrorism, wars, and political uncertainties and hostilities can also lead to a reduction in advertising expenditures as a result of economic uncertainty, disruptions in programming and services (in particular live event programming) or reduced advertising spots due to pre-emptions. For example, during the COVID-19 pandemic some of the Company's advertisers reduced their spending, which had a negative impact on the Company’s advertising revenues, and similar events that adversely affect the Company's advertising revenues could occur again in the future.
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Major sports events, such as the NFL's Super Bowl and the FIFA World Cup and the state, congressional and presidential election cycles also may cause the Company's advertising revenues to vary substantially from year to year. Political advertising expenditures are impacted by the ability and willingness of candidates and political action campaigns to raise and spend funds on advertising and the competitive nature of the elections affecting viewers in markets featuring our programming.
Advertising expenditures may also be affected by changes in consumer behavior and evolving technologies and platforms. There is increasing competition for the leisure time of audiences and demand for the Company's programming as measured by ratings points is a key factor in determining the advertising rates as well as the affiliate rates the Company receives. In addition, as described above, newer technologies and platforms are increasing the number of media and entertainment choices available to audiences, changing the ways viewers enjoy content and enabling them to avoid advertisements. These changes could negatively affect the attractiveness of the Company's offerings to advertisers. The pricing and volume of advertising may also be affected by shifts in spending away from traditional media and toward digital and mobile offerings, which can deliver targeted advertising more promptly, or toward newer ways of purchasing advertising such as through automated purchasing, dynamic advertising insertion and third parties selling local advertising spots and advertising exchanges. These new methods may not be as beneficial to the Company as traditional advertising methods. The Company also generates advertising revenues through its Tubi AVOD service. The market for AVOD advertising campaigns is relatively new and evolving and if this market develops slower or differently than we expect, it could adversely affect our advertising revenues. Declines in advertising revenues may also be caused by regulatory intervention or other third-party action that impacts where and when advertising may be placed.
Advertising sales also largely depend on audience measurement and could be negatively affected if measurement methodologies do not accurately reflect actual viewership levels. Although Nielsen's statistical sampling method is the primary measurement methodology used for our linear television advertising sales, we measure and monetize our digital platforms based on a combination of internal and third-party data, including demographic composite estimates. A consistent, broadly accepted measure of multiplatform audiences across the industry remains to be developed. Although we expect multiplatform measurement innovation and standards to benefit us as the video advertising market continues to evolve, we are still partially dependent on third parties to provide these solutions.
A decrease in advertising expenditures, reduced demand for the Company's programming or the inability to obtain market ratings that adequately measure demand for the Company's content on all platforms could lead to a reduction in pricing and advertising spending, which could have a material adverse effect on the Company's business, financial condition or results of operations.
Because the Company derives a significant portion of its revenues from a limited number of distributors, the failure to enter into or renew affiliation and carriage agreements on favorable terms, or at all, could have a material adverse effect on the Company’s business, financial condition or results of operations.
The Company depends on affiliation and carriage arrangements that enable it to reach a large percentage of households through MVPDs and third party-owned television stations. The inability to enter into or renew MVPD arrangements on favorable terms, or at all, or the loss of carriage on MVPDs' basic programming tiers could reduce the distribution of the Company's owned and operated television stations and broadcast and cable networks, which could adversely affect the Company's revenues from affiliate fees and its ability to sell national and local advertising time. The loss of favorable MVPD packaging, positioning, pricing or other marketing opportunities could also negatively impact the Company's revenues from affiliate fees. These risks are exacerbated by consolidation among traditional MVPDs, their increased vertical integration into the cable or broadcast network business and their use of alternative technologies to offer their subscribers access to local broadcast network programming, which have provided traditional MVPDs with greater negotiating leverage. Competitive pressures faced by MVPDs, particularly in light of evolving consumer viewing patterns and distribution models, could adversely affect the terms of our contract renewals with MVPDs. In addition, if the Company and an MVPD reach an impasse in contract renewal negotiations, the Company's networks and owned and operated television stations could become unavailable to the MVPD's subscribers (i.e., "go dark"), which, depending on the length of time and the size of the MVPD, could have a negative impact on the Company's revenues from affiliate fees and advertising.
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The Company also depends on the maintenance of affiliation agreements and license agreements with third party-owned television stations to distribute the FOX Network and MyNetworkTV in markets where the Company does not own television stations. Consolidation among television station group owners could increase their negotiating leverage and reduce the number of available distribution partners. There can be no assurance that these affiliation and license agreements will be renewed in the future on terms favorable to the Company, or at all. The inability to enter into affiliation or licensing arrangements with third-party owned television stations on favorable terms could reduce distribution of the FOX Network and MyNetworkTV and the inability to enter into such affiliation or licensing arrangements for the FOX Network on favorable terms could adversely affect the Company's affiliate fee revenues and its ability to sell national advertising time.
In addition, the Company has arrangements through which it makes its content available for viewing through third-party online video platforms. If these arrangements are not renewed on favorable or commercially reasonable terms or at all, it could adversely affect the Company's revenues and results of operations.
If the number of subscribers to MVPD services continues to decline or such declines accelerate, the Company’s affiliate fee and advertising revenues could be negatively affected.
As described above, changes in technology and consumer behavior have contributed to industry-wide declines in the number of subscribers to MVPD services, which have had a negative impact on the number of subscribers to the Company’s networks. These industry-wide subscriber declines are expected to continue and possibly accelerate in the future. The majority of the Company’s affiliation agreements with MVPDs are multi-year contracts that provide for payments to the Company that are based in part on the number of MVPD subscribers covered by the agreement. If declines in the number of MVPD subscribers are not fully offset by affiliate rate increases, the Company’s affiliate fee revenues will be negatively affected. Because MVPD subscriber losses could also decrease the potential audience for the Company’s networks, which is a critical factor affecting both the pricing and volume of advertising, future MVPD subscriber declines could also adversely impact the Company’s advertising revenues.
The Company is exposed to risks associated with weak economic conditions and increased volatility and disruption in the financial markets.
Prevailing economic conditions and the state of the financial markets affect various aspects of our business. In recent years, the U.S. economy has experienced a period of weakness and the financial markets have experienced significant volatility as a result of the COVID-19 pandemic, declining economic growth, diminished availability of credit, declines in consumer confidence, concerns regarding high inflation, uncertainty about economic stability and political and sociopolitical uncertainties and conflicts. Additional factors that have affected economic conditions and the financial markets include higher interest rates, global supply chain disruptions, unemployment rates, changes in consumer spending habits and potential changes in trade relationships between the U.S. and other countries. Weak economic conditions have had and may continue to have an adverse impact on the Company's business, financial condition and results of operations. For example, reduced advertising expenditures due to a weak economy can negatively impact our advertising revenues, as described above, and increasing inflation raises our labor and other costs required to operate our business. Increased volatility and weakness in the financial markets, the further tightening of credit markets or a decrease in our debt ratings assigned by ratings agencies could adversely affect our ability to cost-effectively refinance outstanding indebtedness or obtain new financing.
The Company also faces risks associated with the impact of weak economic conditions and disruption in the financial markets on third parties with which the Company does business, including advertisers, affiliates, suppliers, wholesale distributors, retailers, lenders, insurers, vendors, retailers, banks and others. For instance, the inability of the Company's counterparties to obtain capital on acceptable terms could impair their ability to perform under their agreements with the Company and lead to negative effects on the Company, including business disruptions, decreased revenues and increases in bad debt expenses.
There can be no assurance that further weakening of economic conditions or volatility or disruption in the financial markets will not occur. If they do, it could have a material adverse impact on the Company’s business, financial condition or results of operations.
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The Company operates in a highly competitive industry.
The Company competes with other companies for high-quality content to reach large audiences and generate advertising revenue. The Company also competes for advertisers' expenditures and distribution on MVPDs and other third-party digital platforms. The Company's ability to attract viewers and advertisers and obtain favorable distribution depends in part on its ability to provide popular programming and adapt to new technologies and distribution platforms, which are increasing the number of content choices available to audiences. Consolidation among our competitors and other industry participants has increased, and may continue to do so, further intensifying competitive pressures. Our competitors include companies with interests in multiple media businesses that are often vertically integrated, as well as companies in adjacent sectors with significant financial, marketing and other resources, greater efficiencies of scale, fewer regulatory burdens and more competitive pricing. These competitors could also have preferential access to important technologies, such as those that use artificial intelligence or competitive information, including customer data. Our competitors may also enter into business combinations or partnerships that strengthen their competitive position.
Competition for audiences and/or advertising comes from a variety of sources, including broadcast television networks; cable television systems and networks; direct-to-consumer streaming and on-demand platforms and services; mobile, gaming and social media platforms; audio programming; and print and other media. Other television stations or cable networks may change their formats or programming, a new station or new network may adopt a format to compete directly with the Company's stations or networks, or stations or networks might engage in aggressive promotional campaigns. In addition, an increasing number of SVOD services with advertising-supported offerings may intensify competition for audiences and/or advertising. Increased competition in the acquisition of programming may also affect the scope of rights we are able to acquire and the cost of such rights, and the future value of the rights we acquire or retain cannot be predicted with certainty.
There can be no assurance that the Company will be able to compete successfully in the future against existing or potential competitors or that competition in the marketplace will not have a material adverse effect on its business, financial condition or results of operations.
Acceptance of the Company's content by the public is difficult to predict, which could lead to fluctuations in or adverse impacts on revenues.
Programming distribution is a speculative business since the revenues derived from the distribution of content depend primarily on its acceptance by the public, which is difficult to predict. Low public acceptance of the Company's content will adversely affect the Company's results of operations. The commercial success of our programming also depends on the quality and acceptance of other competing programming, the growing number of alternative forms of entertainment and leisure activities, general economic conditions and their effects on consumer spending and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. Moreover, we must often invest substantial amounts in programming and the acquisition of sports rights before we learn the extent to which the content will earn consumer acceptance and, as described below, competition for popular content, particularly sports and entertainment programming, is intense. A decline in the ratings or popularity of the Company's entertainment, news or sports programming or the Company's failure to obtain or retain rights to popular content could adversely affect the Company's advertising revenues in the near term and, over a longer period of time, its affiliate fee revenues.
Our business depends on the popularity of special sports events and the continued popularity of the sports leagues and teams for which we have programming rights.
Our sports business depends on the popularity and success of the sports franchises, leagues and teams for which we have acquired broadcast and cable network programming rights. If a sports league declines in popularity or fails to generate fan enthusiasm, this may negatively impact viewership and advertising and affiliate fee revenues received in connection with our sports programming. Our operating results may be impacted in part by special events, such as the NFL's Super Bowl, which is broadcast on the FOX Network on a rotating basis with other networks, the MLB's World Series and the FIFA World Cup, which occurs every four years (for each of women and men), and other regular and post-season sports events that air on our broadcast television and cable networks. Our advertising and affiliate fee revenues are subject to fluctuations based on the dates of sports events and their availability for viewing on our broadcast television and cable networks and the popularity of the competing teams. For example, any decrease in the number of post-season games played in a
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sports league for which we have acquired broadcast programming rights, or the participation of a smaller-market sports franchise in post-season competition could result in lower advertising revenues for the Company. There can be no assurance that any sports league will continue to generate fan enthusiasm or provide the expected number of regular and post-season games for advertisers and customers, and the failure to do so could result in a material adverse effect on our business, financial condition or results of operations. In prior years, a significant number of live sports events were cancelled or postponed due to the COVID-19 pandemic, which adversely affected our revenues and results of operations. A shortfall in the expected popularity of the sports events for which the Company has acquired rights or in the volume of sports programming the Company expects to distribute could adversely affect the Company's advertising revenues in the near term and, over a longer period of time, its affiliate fee revenues.
The inability to renew programming rights, particularly sports programming rights, on sufficiently favorable terms, or at all, could cause the Company’s advertising and affiliate fee revenues to decline significantly in any given period or in specific markets.
We enter into long-term contracts for both the acquisition and distribution of media programming and products, including contracts for the acquisition of programming rights for sports events and other content, and contracts for the distribution of our programming to content distributors. Programming rights agreements, retransmission consent agreements, carriage contracts and affiliation agreements have varying durations and renewal terms that are subject to negotiation with other parties, the outcome of which is unpredictable. The negotiation of programming rights agreements for popular licensed programming, and popular licensed sports programming in particular, is complicated by the intensity of competition for these rights. Moreover, the value of these agreements may be negatively affected by factors outside of our control, such as league agreements and decisions to alter the number, frequency and timing of regular and post-season games played during a season. We may be unable to renew existing, or enter into new, programming rights agreements on terms that are favorable to us and we may be outbid by third parties and therefore unable to obtain the rights at all. The loss of rights or renewal on less favorable terms could negatively impact the quality or quantity of our programming, in particular our sports programming, and could adversely affect our advertising and affiliate fee revenues. These revenues could also be negatively impacted if we do not obtain exclusive rights to the programming we distribute. Our results of operations and cash flows over the term of a sports programming agreement depend on a number of factors, including the strength of the advertising market, our audience size, the timing and amount of our rights payments and our ability to secure distribution from and impose surcharges or obtain carriage on MVPDs for the content. If escalations in programming rights costs (together with our production and distribution costs) are not offset by increases in advertising and affiliate fee revenues, our results of operations could be adversely affected.
Damage to our brands, particularly the FOX brand, or our reputation could have a material adverse effect on our business, financial condition or results of operations.
Our brands, particularly the FOX brand, are among our most valuable assets. We believe that our brand image, awareness and reputation strengthen our relationship with consumers and contribute significantly to the success of our business. Maintaining, enhancing and extending our brands may require us to make significant investments in marketing, programming or new products, services or events, and these investments may not be successful. We may introduce new programming that is not popular with our consumers and advertisers, which may negatively affect our brands. To the extent our content, in particular our live news and sports programming and primetime entertainment programming, is not compelling to consumers, our ability to maintain a positive reputation may be adversely impacted. The Company’s brands, credibility and reputation could be damaged by incidents that erode consumer, advertiser or business partner trust or a perception that the Company’s offerings, including its journalism, programming and other content, are low quality, unreliable or fail to attract and retain audiences. Litigation, governmental scrutiny and fines and significant negative claims or publicity regarding the Company or its operations, content, products, management, employees, practices, advertisers, business partners and culture, including individuals associated with content we create or license, may damage the Company's reputation and brands, even if meritless or untrue. Furthermore, to the extent our marketing, customer service and public relations efforts are not effective or result in negative consumer reaction, our ability to maintain a positive reputation may likewise be adversely impacted. If we are not successful in maintaining or enhancing the image or awareness of our brands, or if our reputation is harmed for any reason, it could have a material adverse effect on our business, financial condition or results of operations.
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Our investments in new businesses, products, services and technologies through acquisitions and other strategic investments present many risks, and we may not realize the financial and strategic goals we had contemplated, which could adversely affect our business, financial condition or results of operations.
We have acquired and invested in, and expect to continue acquiring and investing in, new businesses, products, services and technologies that complement, enhance or expand our current businesses or otherwise offer us growth opportunities. Such acquisitions and strategic investments may involve significant risks and uncertainties, including insufficient revenues from an investment to offset any new liabilities assumed and expenses associated with the investment; a failure of the investment or acquired business to perform as expected, meet financial projections or achieve strategic goals; a failure to further develop an acquired business, product, service or technology; unidentified issues not discovered in our due diligence that could cause us to not realize anticipated benefits or to incur unanticipated liabilities; difficulties in integrating the operations, personnel, technologies and systems of acquired businesses; the potential loss of key employees or customers of acquired businesses; the diversion of management attention from current operations; and compliance with new regulatory regimes. Because acquisitions and investments are inherently risky and their anticipated benefits or value may not materialize, our acquisitions and investments may adversely affect our business, financial condition or results of operations.
The loss of key personnel, including talent, could disrupt the management or operations of the Company’s business and adversely affect its revenues.
The Company's business depends on the continued efforts, abilities and expertise of its Chair K. Rupert Murdoch and Executive Chair and Chief Executive Officer Lachlan K. Murdoch, and other key employees and news, sports and entertainment personalities. Although we maintain long-term and emergency transition plans for key management personnel, we believe that our executive officers’ unique combination of skills and experience would be difficult to replace and their loss could have a material adverse effect on the Company, including the impairment of its ability to successfully execute its business strategy. Additionally, the Company employs or independently contracts with several news, sports and entertainment personalities who are featured on programming the Company offers. News, sports and entertainment personalities sometimes have a significant impact on the ranking of a cable network or station and its ability to attract and retain an audience and sell advertising. There can be no assurance that our news, sports and entertainment personalities will remain with us or retain their current appeal, that the costs associated with retaining current talent and hiring new talent will be favorable or acceptable to us, or that new talent will be as successful as their predecessors. Any of the foregoing could adversely affect the Company's business, financial condition or results of operations.
Labor disputes may disrupt our operations and adversely affect the Company’s business, financial condition or results of operations.
In a variety of the Company's businesses, the Company and its partners engage the services of writers, directors, actors, musicians and other creative talent, production crew members, trade employees and others whose services are subject to collective bargaining agreements. Certain of these are industry-wide agreements, and the Company lacks practical influence with respect to the negotiation and terms of collective bargaining agreements. The writers guild (“WGA”), screen actors guild (“SAG-AFTRA”) and directors guild (“DGA”) collective bargaining agreements expired in 2023. The WGA members went on strike in May 2023 and the SAG-AFTRA members went on strike in July 2023. In June 2023, the DGA announced that it had reached a tentative agreement with the Association of Motion Picture and Television Producers, which negotiates with the guilds on behalf of content producers. When negotiations to renew collective bargaining agreements are not successful or become unproductive, strikes, work stoppages or lockouts have occurred, such as the WGA and SAG-AFTRA strikes in the Spring and Summer of 2023, and further strikes, work stoppages or lockouts could occur in the future. Such events have caused, and may continue to cause, delays in production and may lead to higher costs in connection with new collective bargaining agreements, which could reduce profit margins and could, over the long term, have an adverse effect on the Company's business, financial condition or results of operations.
In addition, our broadcast television and cable networks have programming rights agreements of varying scope and duration with various sports leagues to broadcast and produce sports events, including certain college football and basketball, NFL and MLB games. Any labor disputes that occur in any sports league for which we have the rights to broadcast live games or events may preclude us from airing or otherwise
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distributing scheduled games or events, resulting in decreased revenues, which could adversely affect our business, financial condition or results of operations.
The Company could suffer losses due to asset impairment charges for goodwill, intangible assets, programming and other assets and investments.
The Company performs an annual impairment assessment of its recorded goodwill and indefinite-lived intangible assets, including FCC licenses. The Company also continually evaluates whether current factors or indicators, such as the prevailing conditions in the capital markets, require the performance of an interim impairment assessment of those assets, as well as other investments and other long-lived assets. Any significant shortfall, now or in the future, in advertising revenue and/or the expected popularity of our programming could lead to a downward revision in the fair value of certain reporting units. A downward revision in the fair value of a reporting unit, indefinite-lived intangible assets, programming rights, investments or long-lived assets could result in a non-cash impairment charge. Any such charge could be material to the Company’s reported net earnings.
Risks Relating to Cybersecurity, Piracy, Privacy and Data Protection
The degradation, failure or misuse of the Company’s network and information systems and other technology could cause a disruption of services or improper disclosure of personal data or other confidential information, resulting in increased costs, liabilities or loss of revenue.
Cloud services, content delivery and other networks, information systems and other technologies that we or our vendors or other partners use, including technology systems used in connection with the production and distribution of our content (the “Systems”), are critical to our business activities, and shutdowns or disruptions of, and cybersecurity attacks on, the Systems pose increasing risks. Disruptions to the Systems, such as computer hacking and phishing, theft, computer viruses, ransomware, worms or other destructive software, process breakdowns, denial of service attacks or other malicious activities, as well as power outages, natural or other disasters (including extreme weather), terrorist activities or human error, may affect the Systems and could result in disruption of our services, misappropriation, misuse, alteration, theft, loss, leakage, falsification, and accidental or premature release or improper disclosure of confidential or other information, including intellectual property and personal data (of third parties, employees and users of our streaming services and other digital properties) contained on the Systems. The techniques used to access, disable or degrade service or sabotage systems change frequently and continue to become more sophisticated and targeted, and the increasing use of artificial intelligence may intensify cybersecurity risks. While we and our vendors and partners continue to develop, implement and maintain security measures seeking to identify and mitigate cybersecurity risks, including unauthorized access to or misuse of the Systems, such efforts are costly, require ongoing monitoring and updating and may not be successful in preventing these events from occurring. In addition, the Company’s recovery and business continuity plans may not be adequate to address any cybersecurity incidents that occur. The Company’s high-profile sports and entertainment programming and its extensive news coverage of elections, sociopolitical events and public controversies subject us to heightened cybersecurity risks. Although no cybersecurity incident has been material to the Company’s businesses to date, we expect to continue to be subject to cybersecurity threats and attacks and there can be no assurance that we will not experience a material incident. Any cybersecurity incidents could result in a disruption of our operations, customer or advertiser dissatisfaction, damage to our reputation or brands, regulatory investigations, claims, lawsuits or loss of customers or revenue, and the Company may also be subject to liability under relevant contractual obligations and laws and regulations protecting personal data and may be required to expend significant resources to defend, remedy and/or address any incidents. The Company may not have adequate insurance coverage to compensate it for any losses that may occur.
Technological developments may increase the threat of content piracy and signal theft and limit the Company’s ability to protect its intellectual property rights.
Content piracy and signal theft present a threat to the Company’s revenues from products and services, including television shows, cable and other programming. The Company seeks to limit the threat of content piracy as well as cable and direct broadcast satellite programming signal theft; however, policing unauthorized use of the Company’s products and services and related intellectual property is often difficult and the steps taken by the Company may not in every case prevent infringement. Although no content theft has been material to the Company’s businesses to date, we expect to continue to be subject to content threats and there can be
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no assurance that we will not experience a material incident. Developments in technology, including artificial intelligence, digital copying, file compression technology, growing penetration of high-bandwidth Internet connections, increased availability and speed of mobile data networks, and new devices and applications that enable unauthorized access to content, increase the threat of content piracy by making it easier to create, access, duplicate, widely distribute and store high-quality pirated material. In addition, developments in software or devices that circumvent encryption technology and the falling prices of devices incorporating such technologies increase the threat of unauthorized use and distribution of direct broadcast satellite programming signals and the proliferation of user-generated content sites and live and stored video streaming sites, which deliver unauthorized copies of copyrighted content, including those emanating from other countries in various languages, may adversely impact the Company’s businesses. The proliferation of unauthorized distribution and use of the Company’s content could have an adverse effect on the Company’s businesses and profitability because it reduces the revenue that the Company could potentially receive from the legitimate sale and distribution of its products and services.
The Company takes a variety of actions to combat piracy and signal theft, both individually and, in some instances, together with industry associations, but the protection of the Company’s intellectual property rights depends on the scope and duration of the Company’s rights as defined by applicable laws in the U.S. and abroad and how those laws are construed. If those laws are interpreted in ways that limit the extent or duration of the Company’s rights or if existing laws are changed, the Company’s ability to generate revenue from intellectual property may decrease or the cost of obtaining and enforcing our rights may increase. A change in the laws of one jurisdiction may also have an impact on the Company’s overall ability to protect its intellectual property rights across other jurisdictions. The Company’s efforts to enforce its rights and protect its products, services and intellectual property may not be successful in preventing content piracy or signal theft. Further, while piracy and the proliferation of piracy-enabling technology tools continue to escalate, if any laws intended to combat piracy and protect intellectual property are repealed, weakened or not adequately enforced, or if the applicable legal systems fail to evolve and adapt to new technologies that facilitate piracy, we may be unable to effectively protect our rights and the value of our intellectual property may be negatively impacted, and our costs of enforcing our rights could increase
The Company is subject to complex laws, regulations, rules, industry standards, and contractual obligations related to privacy and personal data protection, which are evolving, inconsistent and potentially costly.
We are subject to U.S. federal and state laws and regulations, as well as those of other countries, relating to the collection, use, disclosure, and security of personal information. The number and complexity of these laws and regulations continues to increase. For example, California, Virginia, Utah, Colorado, Connecticut, and several other states have passed legislation imposing broad obligations on businesses’ collection, use, handling and disclosure of personal information of their respective residents and imposing fines for noncompliance. The FTC also has initiated a rulemaking proceeding regarding potential rules concerning the collection, use, disclosure and security of personal information. In addition, the E.U., the U.K. and other countries have privacy and data security legislation, with significant penalties for violations, that apply to certain of the Company’s operations. New privacy and data protection laws and regulations continue to be introduced and interpretations of existing privacy laws and regulations, some of which may be inconsistent with one another, continue to evolve. As a result, significant uncertainty exists as to their application and scope. Compliance with these laws and regulations may be costly and could require the Company to change its business practices, including in connection with data-driven targeted advertising. Although the Company expends significant resources to comply with privacy and data protection laws, we may be subject to regulatory or other legal action despite these efforts. Any such action could result in damage to our reputation or brands, loss of customers or revenue, and other negative impacts to our operations. The Company may also be subject to liability under relevant contractual obligations and may be required to expend significant resources to defend, remedy and/or address any claims. The Company may not have adequate insurance coverage to compensate it for any losses that may occur. For more information, see Item 1, “Government Regulation – Privacy and Information Regulation.”
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Risks Relating to Legal and Regulatory Matters
Changes in laws and regulations may have an adverse effect on the Company’s business, financial condition or results of operations.
The Company is subject to a variety of laws and regulations in the jurisdictions in which its businesses operate. In general, the television broadcasting and traditional MVPD industries in the U.S. are highly regulated by federal laws and regulations issued and administered by various federal agencies, including the FCC. The FCC generally regulates, among other things, the ownership of media, broadcast and multichannel video programming and technical operations of broadcast licensees. For example, the Company is required to apply for and operate in compliance with licenses from the FCC to operate a television station, purchase a new television station, or sell an existing television station, with licenses generally subject to an eight-year renewable term. Our program services and online properties are subject to a variety of laws and regulations, including those relating to issues such as content regulation, user privacy and data protection, and consumer protection. Further, the United States Congress, the FCC, the FTC and state legislatures currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters, including technological changes and measures relating to network neutrality, privacy and data security, which could, directly or indirectly, affect the operations and ownership of the Company’s media properties. From time to time, the FCC considers whether virtual MVPDs should be considered MVPDs (as defined by the FCC) and regulated as such, which could negatively impact the Company’s distribution model. Any restrictions on political or other advertising may adversely affect the Company’s advertising revenues. In addition, some policymakers maintain that traditional MVPDs should be required to offer a la carte programming to subscribers on a network-by-network basis or “family friendly” programming tiers. Unbundling packages of program services may increase both competition for carriage on distribution platforms and marketing expenses, which could adversely affect the business, financial condition or results of operations of the Company’s cable networks. The threat of regulatory action or increased scrutiny that deters certain advertisers from advertising or reaching their intended audiences could adversely affect advertising revenue. Similarly, new laws or regulations or changes in interpretations of laws or regulations could require changes in the operations or ownership of our business. Furthermore, new laws, regulations and standards related to environmental (including climate), social and governance matters are likely to impose additional costs on us, expose us to new risks and subject us to increasing scrutiny. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
The Company may be subject to investigations or fines from governmental authorities, including under FCC rules and policies, or delays in our renewal and other applications with the FCC.
FCC rules prohibit the broadcast of obscene material at any time and indecent or profane material on television or radio broadcast stations between the hours of 6 a.m. and 10 p.m. The FCC has indicated that, in addition to issuing fines to licensees, it would consider initiating license revocation proceedings for “serious” indecency violations. We air a significant amount of live news reporting and live sports coverage on our broadcast television stations and networks and a portion of our content is under the control of our on-air talent. The Company cannot predict whether information delivered by our stations and on-air talent could violate FCC rules related to indecency, which had been found to be unconstitutionally vague by the U.S. Supreme Court, especially given the spontaneity of live news and sports programming. Violation of the FCC’s indecency rules could subject us to government investigation, penalties, license revocation, or renewal or qualification proceedings, which could have a material adverse effect on our business, financial condition or results of operations.
The Communications Act and FCC regulations limit the ability of non-U.S. citizens and certain other persons to invest in us.
The Company owns broadcast station licensees in connection with its ownership and operation of U.S. television stations. Under the Communications Act of 1934, as amended, which we refer to as the Communications Act, and the FCC rules, without the FCC’s prior approval, no broadcast station licensee may be owned by a corporation if more than 25% of its stock is owned or voted by non-U.S. persons, their representatives, or by any other corporation organized under the laws of a foreign country. The Company’s amended and restated certificate of incorporation authorizes the Board of Directors to take action to prevent, cure or mitigate the effect of stock ownership above the applicable foreign ownership threshold, including: refusing to permit any transfer of Common Stock to or ownership of Common Stock by a non-U.S. stockholder;
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voiding a transfer of Common Stock to a non-U.S. stockholder; suspending rights of stock ownership if held by a non-U.S. stockholder; or redeeming Common Stock held by a non-U.S. stockholder. We are currently in compliance with applicable U.S. law and continue to monitor our foreign ownership based on our assessment of the information reasonably available to us, but we are not able to predict whether we will need to take action pursuant to our amended and restated certificate of incorporation. The FCC could review the Company’s compliance with applicable U.S. law in connection with its consideration of the Company’s renewal applications for licenses to operate the broadcast stations the Company owns.
The failure or destruction of satellites or transmitter facilities the Company depends on to distribute its programming could materially adversely affect its businesses and results of operations, as could changes in FCC regulations governing the availability and use of satellite transmission spectrum.
The Company uses satellite systems to transmit its broadcast and cable networks to affiliates. The distribution facilities include uplinks, communications satellites and downlinks. Transmissions may be disrupted as a result of local disasters, including extreme weather, that impair on-ground uplinks or downlinks, or as a result of an impairment of a satellite. Currently, there are a limited number of communications satellites available for the transmission of programming. If a disruption occurs, failure to secure alternate distribution facilities in a timely manner could have a material adverse effect on the Company’s business and results of operations. Each of the Company’s television stations and cable networks uses studio and transmitter facilities that are subject to damage or destruction. Failure to restore such facilities in a timely manner could have a material adverse effect on the Company’s businesses and results of operations. Further, changes in FCC regulations have reduced the availability and use of satellite transmission spectrum. In 2020, the FCC began reallocating and “re-packing” a band of satellite transmission spectrum known as the “C-Band” used by the television industry to transmit programming in order to free up spectrum for the next generation of commercial wireless broadband services. This has reduced the availability and use of satellite transmission spectrum for the television industry, and additional changes in FCC regulations could lead to further reductions. The decreased availability of satellite transmission spectrum could diminish the quality of and increase interference to our transmissions, which could significantly hinder the Company’s ability to deliver its programming to broadcast affiliates and traditional MVPDs.
The Company could be subject to significant tax liabilities.
We are subject to taxation in U.S. federal, state and local, as well as certain international jurisdictions. Changes in tax laws, regulations, practices or the interpretations thereof (including changes in legislation currently being considered) could adversely affect the Company’s results of operations or its tax assets. Judgment is required in evaluating and estimating our provision and accruals for taxes. In addition, transactions occur during the ordinary course of business or otherwise for which the ultimate tax determination is uncertain.
Tax returns are routinely audited, tax-related litigation or settlements may occur, and certain jurisdictions may assess income tax liabilities against us. The final outcomes of tax audits, investigations, and any related litigation could result in materially different tax recognition from our historical tax provisions and accruals. These outcomes could conflict with private letter rulings, opinions of counsel or other interpretations provided to the Company. If these matters are adversely resolved, we may be required to recognize additional charges to our tax provisions and pay significant additional amounts with respect to current or prior periods or our taxes in the future could increase, which could have a material adverse effect on our financial condition or results of operations.
Unfavorable litigation or governmental investigation results could require us to pay significant amounts or lead to onerous operating procedures.
We are subject from time to time to lawsuits, including claims relating to competition, intellectual property rights, employment and labor matters, personal injury and property damage, free speech, customer privacy, regulatory requirements, and advertising, marketing and selling practices. See Note 14, “Commitments and Contingencies,” to the accompanying consolidated financial statements included in this Form 10-K for a discussion of certain of these matters. The Company has incurred significant expenses defending against the defamation and disparagement matters described in Note 14, including the payment of approximately $800 million to settle the Dominion matter and a related lawsuit in April 2023.
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The Company continues to believe the Smartmatic and other lawsuits alleging defamation or disparagement as well as related derivative lawsuits are without merit and intends to defend against them vigorously, including through any appeals.However, the outcome of these pending matters is subject to significant uncertainty, and it is possible that an adverse resolution of one or more of these pending matters could result in reputational harm and/or significant monetary damages, injunctive relief or settlement costs. There can be no assurance that the ultimate resolution of these pending matters will not have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
Greater constraints on the use of arbitration to resolve certain disputes could adversely affect our business. We also spend substantial resources complying with various regulatory and government standards, including any related investigations and litigation. We may incur additional significant expenses in the future defending against any lawsuit or government charge and may be required to pay amounts or otherwise change our operations in ways that could adversely impact our businesses, results of operations, financial condition or cash flows. In addition, regardless of merit or outcome, litigation and government investigations are time-consuming and costly to defend, divert management’s attention and resources away from our business, may result in reputational harm and may impair our ability to conduct our business.
Risks Relating to Our Ownership Structure
Certain of the Company’s directors and officers may have actual or potential conflicts of interest because of their equity ownership in News Corp or because they also serve as officers and/or on the board of directors of News Corp.
In June 2013, 21CF completed the separation of its businesses into two independent publicly traded companies by distributing to its shareholders shares of a new company called News Corporation (“News Corp”). Certain of the Company’s directors and executive officers own shares of common stock of News Corp, and the individual holdings may be significant for some of these individuals compared to their total assets. In addition, certain of the Company’s officers and directors also serve as officers and/or as directors of News Corp, including our Chair, K. Rupert Murdoch, who serves as News Corp’s Executive Chairman, and our Executive Chair and Chief Executive Officer, Lachlan K. Murdoch, who serves as News Corp’s Co-Chairman. This ownership of or service to both companies may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for News Corp and the Company. In addition to any other arrangements that the Company and News Corp may agree to implement, the Company and News Corp have agreed that officers and directors who serve at both companies will recuse themselves from decisions where conflicts arise due to their positions at both companies.
Our amended and restated by-laws acknowledge that our directors and officers, as well as certain of our stockholders, including K. Rupert Murdoch, certain members of his family and certain family trusts (so long as such persons continue to own, in the aggregate, 10% or more of the voting stock of each of News Corp and the Company), each of which we refer to as a covered stockholder, are or may become stockholders, directors, officers, employees or agents of News Corp and certain of its affiliates. Our amended and restated by-laws provide that any such overlapping person will not be liable to us, or to any of our stockholders, for breach of any fiduciary duty that would otherwise exist because such individual directs a corporate opportunity to News Corp instead of us. The provisions in our amended and restated by-laws could result in an overlapping person submitting any corporate opportunities to News Corp instead of us.
Certain provisions of the Company’s amended and restated certificate of incorporation, amended and restated by-laws, Delaware law and the ownership of the Company’s Common Stock by the Murdoch Family Trust may discourage takeovers and the concentration of ownership will affect the voting results of matters submitted for stockholder approval.
The Company’s amended and restated certificate of incorporation and amended and restated by-laws contain certain anti-takeover provisions that may make more difficult or expensive a tender offer, change in control, or takeover attempt that is opposed by the Company’s Board of Directors or certain stockholders holding a significant percentage of the voting power of the Company’s outstanding voting stock. In particular, the
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amended and restated certificate of incorporation and amended and restated by-laws provide for, among other things:
•a dual class common equity capital structure, in which holders of FOX Class A Common Stock can vote only in very specific, limited circumstances;
•a prohibition on stockholders taking any action by written consent without a meeting (unless there are three record holders or fewer);
•special stockholders’ meeting to be called only by a majority of the Board of Directors, the Chair or vice or deputy chair, or upon the written request of holders of not less than 20% of the voting power of our outstanding voting stock;
•the requirement that stockholders give the Company advance notice to nominate candidates for election to the Board of Directors or to make stockholder proposals at a stockholders’ meeting;
•the requirement of an affirmative vote of at least 65% of the voting power of the Company’s outstanding voting stock to amend or repeal our amended and restated by-laws;
•restrictions on the transfer of the Company’s shares; and
•the Board of Directors to issue, without stockholder approval, preferred stock and series common stock with such terms as the Board of Directors may determine.
These provisions could discourage potential acquisition proposals and could delay or prevent a change in control of the Company, even in the case where a majority of the stockholders may consider such proposals desirable.
Further, as a result of his ability to appoint certain members of the board of directors of the corporate trustee of the Murdoch Family Trust, which beneficially owns less than one percent of the outstanding FOX Class A Common Stock and 43.39% of FOX Class B Common Stock, K. Rupert Murdoch may be deemed to be a beneficial owner of the shares beneficially owned by the Murdoch Family Trust. K. Rupert Murdoch, however, disclaims any beneficial ownership of these shares. Also, K. Rupert Murdoch beneficially owns or may be deemed to beneficially own an additional less than one percent of FOX Class A Common Stock and less than one percent of FOX Class B Common Stock. Thus, K. Rupert Murdoch may be deemed to beneficially own in the aggregate less than one percent of FOX Class A Common Stock and 43.99% of FOX Class B Common Stock.
This concentration of voting power could discourage third parties from making proposals involving an acquisition of the Company. Additionally, the ownership concentration of FOX Class B Common Stock by the Murdoch Family Trust increases the likelihood that proposals submitted for stockholder approval that are supported by the Murdoch Family Trust will be adopted and proposals that the Murdoch Family Trust does not support will not be adopted, whether or not such proposals to stockholders are also supported by the other holders of FOX Class B Common Stock.
The Company’s Board of Directors has approved a $7 billion stock repurchase program for the FOX Class A Common Stock and FOX Class B Common Stock, which has and in the future could increase the percentage of FOX Class B Common Stock held by the Murdoch Family Trust. The Company has entered into a stockholders agreement with the Murdoch Family Trust pursuant to which the Company and the Murdoch Family Trust have agreed not to take actions that would result in the Murdoch Family Trust and Murdoch family members together owning more than 44% of the outstanding voting power of the shares of FOX Class B Common Stock or would increase the Murdoch Family Trust’s voting power by more than 1.75% in any rolling 12-month period. The Murdoch Family Trust would forfeit votes to the extent necessary to ensure that the Murdoch Family Trust and the Murdoch family collectively do not exceed 44% of the outstanding voting power of the Class B Common Stock, except where a Murdoch family member votes their own shares differently from the Murdoch Family Trust on any matter.
Risks Related to the Company’s Separation from 21CF
The indemnification arrangements the Company entered into with 21CF in connection with the Transaction may require the Company to divert cash to satisfy indemnification obligations to 21CF. The
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indemnification from 21CF may not be sufficient to insure the Company against the full amount of liabilities that have been allocated to 21CF.
Pursuant to the agreements the Company and 21CF entered into in connection with the Transaction, 21CF will indemnify the Company for certain liabilities and the Company will indemnify 21CF for certain liabilities. Payments pursuant to these indemnities may be significant and could negatively impact our business. Third parties could also seek to hold the Company responsible for any of the liabilities of the businesses that were retained by 21CF in connection with the Transaction. 21CF has agreed to indemnify the Company for such liabilities, but such indemnity from 21CF may not be sufficient to protect the Company against the full amount of such liabilities, and 21CF may not be able to fully satisfy its indemnification obligations. Moreover, even if the Company ultimately succeeds in recovering from 21CF any amounts for which it is held liable, the Company may be temporarily required to bear these losses itself. These risks could negatively affect our business, financial condition, results of operations or cash flows.
The Company could be liable for income taxes owed by 21CF.
Each member of the 21CF consolidated group, which, prior to the Transaction, included 21CF, the Company 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 for periods prior to and including the Transaction. Consequently, the Company could be liable in the event any such liability is incurred, and not discharged, by any other member of what was previously the 21CF consolidated group. The tax matters agreement entered into in connection with the Transaction requires 21CF and/or Disney to indemnify the Company for any such liability. Disputes or assessments could arise during future audits by the taxing authorities in amounts that the Company cannot quantify.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
FOX owns the FOX Studio Lot in Los Angeles, California. The historic lot is located on over 50 acres of land and has over 1.85 million square feet of space for both administration and production/post-production services available to service a wide array of industry clients, including 15 sound stages, two broadcast studios, theaters and screening rooms, editing rooms and other television and film production facilities. The FOX Studio Lot provides two primary revenue streams — the lease of a portion of the office space to Disney and other third parties and the operation of studio facilities for third party productions, which until 2026 will predominantly be Disney productions.
In addition to the FOX Studio Lot in Los Angeles, California, FOX also owns and leases various real properties, primarily in the U.S., that are utilized in the conduct of its businesses. Each of these properties is considered to be in good condition, adequate for its purpose and suitably utilized according to the individual nature and requirements of the relevant operations. FOX’s policy is to improve and replace property as considered appropriate to meet the needs of the individual operations.
ITEM 3. LEGAL PROCEEDINGS
See Note 14—Commitments and Contingencies to the accompanying Consolidated Financial Statements of FOX under the heading “Contingencies” for a discussion of the Company’s legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Fox Corporation’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”), are listed and traded on The NasdaqGlobal Select Market under the symbols “FOXA” and “FOX,” respectively. As of June 30, 2023, there were approximately 15,100 holders of record of shares of Class A Common Stock and approximately 3,400 holders of record of shares of Class B Common Stock.
Below is a summary of the Company’s repurchases of its Class A Common Stock and Class B Common Stock during fiscal 2023:
(in millions)
Total first quarter fiscal 2023
Total second quarter fiscal 2023
Total third quarter fiscal 2023
Total fourth quarter fiscal 2023
In total, the Company repurchased approximately 54 million shares of Common Stock for $2 billion during fiscal 2023.
ITEM 6. [RESERVED]
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ITEM 7. 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 consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The consolidated financial statements are referred to as the “Financial Statements” herein.
INTRODUCTION
The Transaction
FOX became a standalone publicly traded company on March 19, 2019, when Twenty-First Century Fox, Inc. (“21CF”) spun off the Company to 21CF stockholders and FOX'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”) began trading independently on The Nasdaq Global Select Market (the “Transaction”). In connection with the Transaction, 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 The Walt Disney Company (“Disney”) acquired the remaining 21CF assets and 21CF became a wholly-owned subsidiary of Disney. The Separation and the Transaction 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 (the “21CF Disney Merger Agreement”), by and among 21CF, Disney and certain subsidiaries of Disney.
In connection with the Separation, the Company entered into a tax matters agreement among the Company, Disney and 21CF which governs the parties’ respective rights, responsibilities and obligations with respect to certain tax matters. Under this agreement, 21CF will generally indemnify the Company against any taxes required to be reported on a consolidated or separate tax return of 21CF and/or any of its subsidiaries, including any taxes resulting from the Separation and the Transaction, and the Company will generally indemnify 21CF against any taxes required to be reported on a separate tax return of the Company or any of its subsidiaries.
Pursuant to the 21CF Disney Merger Agreement, immediately prior to the Transaction, the Company paid 21CF a dividend (the “Dividend”) for the estimated taxes associated with the Transaction. The final determination of the taxes included an estimated $5.8 billion in respect of the Separation and the Transaction for which the Company is responsible pursuant to the 21CF Disney Merger Agreement and an estimated $700 million prepayment in respect of divestitures (collectively, the “Transaction Tax”).
As a result of the Separation and the Transaction, which was a taxable transaction for which an estimated tax liability of $5.8 billion was included in the Transaction Tax paid by the Company, FOX obtained a tax basis in its assets equal to their respective fair market values. This resulted in estimated annual tax deductions of approximately $1.5 billion, which is expected to continue over the next several years due to the amortization of the additional tax basis. Such estimates are subject to revisions, which could be material, based upon the occurrence of future events. This amortization is estimated to reduce the Company’s fiscal 2023 cash tax liability by approximately $360 million at the current combined federal and state applicable tax rate of approximately 24%.
Included in the Transaction Tax was the Company’s share of the estimated tax liabilities of $700 million related to the anticipated divestitures by Disney of certain assets, principally the FOX Sports Regional Sports Networks (“RSNs”), which Disney sold during calendar year 2019 (“Divestiture Tax”). During fiscal 2021, the Company and Disney reached an agreement to settle the majority of the 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 20—Additional Financial Information to the accompanying Financial Statements under the heading "Other, net”). The balance of the Divestiture Tax is subject to adjustment in the future, but any such adjustment is not expected to have a material impact on the financial results of the Company.
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Basis of Presentation
The Company’s financial statements are presented on a consolidated basis.
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 either during the fiscal year ended June 30, (“fiscal”) 2023 or early fiscal 2024 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 fiscal 2023, 2022 and 2021. 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 fiscal 2023, 2022 and 2021, as well as a discussion of the Company’s outstanding debt and commitments, both firm and contingent, that existed as of June 30, 2023. 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.
•Critical Accounting Policies—This section discusses accounting policies considered important to the Company’s financial condition and results of operations, and which require significant judgment and estimates on the part of management in application. In addition, Note 2—Summary of Significant Accounting Policies to the accompanying Financial Statements summarizes the Company’s significant accounting policies, including the critical accounting policy discussion found in this section.
•Caution Concerning Forward-Looking Statements—This section provides a description of the use of forward-looking information appearing in this Annual Report on Form 10-K, 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 Item 1A. “Risk Factors” in this Annual Report 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 produces and licenses news and sports content distributed through traditional cable television systems, direct broadcast satellite operators and telecommunication companies (“traditional MVPDs”), virtual multi-channel video programming distributors (“virtual MVPDs”) and other digital platforms, primarily in the U.S.
•Television, which produces, acquires, markets and distributes programming through the FOX broadcast network, advertising-supported video-on-demand (“AVOD”) service Tubi, 29 full power broadcast television stations, including 11 duopolies, and other digital platforms, primarily in the U.S. Eighteen of the broadcast television stations are affiliated with the FOX Network, 10 are affiliated with MyNetworkTV and one is an independent station. The segment also includes various production companies that produce content for the Company and third parties.
•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.
We use the term "MVPDs" to refer collectively to traditional MVPDs and virtual MVPDs.
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The Company’s Cable Network Programming and Television segments derive the majority of their revenues from affiliate fees for the transmission of content and advertising sales. For fiscal 2023, the Company generated revenues of $14.9 billion, of which approximately 47% was generated from affiliate fees, approximately 44% was generated from advertising, and approximately 9% was generated from other operating activities.
Affiliate fees primarily include (i) monthly subscriber-based license and retransmission consent fees paid by programming distributors that carry our cable networks and our owned and operated television stations and (ii) fees received from non-owned and operated television stations that are affiliated with the FOX Network. U.S. law governing retransmission consent provides a mechanism for the television stations owned by the Company to seek and obtain payment from MVPDs that carry the Company’s broadcast signals.
The Company’s revenues are impacted by rate changes, changes in the number of subscribers to the Company’s content and changes in the expenditures by advertisers. In addition, advertising revenues are subject to seasonality and cyclicality as a result of the impact of state, congressional and presidential election cycles and special events that air on the Company’s networks, including the National Football League’s (“NFL”) Super Bowl, which is broadcast on the FOX Network on a rotating basis with other networks, and the Fédération Internationale de Football Association (“FIFA”) World Cup, which occurs every four years (for each of women and men), and other regular and post-season sports events, including one NFL Divisional playoff game that is aired on a rotating annual basis with another network.
The cable network programming and television industries continue to evolve rapidly, with changes in technology leading to alternative methods for the delivery and storage of digital content. These technological advancements have driven changes in consumer behavior as consumers now have more control over when, where and how they consume content. Consumer preferences have evolved toward lower cost alternatives, including direct-to-consumer offerings. These changes in technologies and consumer behavior have contributed to declines in the number of subscribers to MVPD services, and these declines are expected to continue and possibly accelerate in the future.
At the same time, technological changes have increased advertisers’ options for reaching their target audiences. There has been a substantial increase in the availability of content with reduced advertising or without advertising at all. As consumers switch to digital consumption of video content, there is still to be developed a consistent, broadly accepted measure of multiplatform audiences across the industry. Furthermore, the pricing and volume of advertising may be affected by shifts in spending from more traditional media and toward digital and mobile offerings, which can deliver targeted advertising more promptly, or toward newer ways of purchasing advertising. In addition, the market for AVOD advertising campaigns is relatively new and evolving.
The Company operates in a highly competitive industry and its performance is dependent, to a large extent, on the impact of changes in consumer behavior as a result of new technologies, the sale of advertising, the maintenance, renewal and terms of its carriage, affiliation and content agreements and programming rights, the popularity of its content, general economic conditions (including financial market conditions), the Company’s ability to manage its businesses effectively, and its relative strength and leverage in the industry. For more information, see Item 1. “Business” and Item 1A. “Risk Factors.”
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RESULTS OF OPERATIONS
Results of Operations—Fiscal 2023 versus Fiscal 2022
The following table sets forth the Company’s operating results for fiscal 2023, as compared to fiscal 2022:
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Selling, general and administrative (2,049) (1,920) (129) (7) %
Depreciation and amortization (411) (363) (48) (13) %
Impairment and restructuring charges (111) — (111) **
Less: Net income attributable to noncontrolling interests (14) (28) 14 50 %
Net income attributable to Fox Corporation stockholders $ 1,239 $ 1,205 $ 34 3 %
** not meaningful
Overview—The Company’s revenues increased 7% for fiscal 2023, as compared to fiscal 2022, due to higher affiliate fee, advertising and other revenues. 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, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals, partially offset by a lower average number of subscribers across all networks. The increase in advertising revenue was primarily due to revenues resulting from the broadcasts of Super Bowl LVII and the FIFA Men’s World Cup, continued growth at Tubi, higher political advertising revenue at the FOX Television Stations principally due to the November 2022 U.S. midterm elections, and additional NFL post-season games. Partially offsetting this increase was the absence of NFL Thursday Night Football (“TNF”) and lower ratings at the FOX Network in the current year. The increase in other revenues was primarily due to the full year impact of acquisitions of entertainment production companies in fiscal 2022 and higher FOX Nation subscription revenues.
Operating expenses increased 6% for fiscal 2023, as compared to fiscal 2022, primarily due to higher sports programming rights amortization and production costs driven by the broadcasts of Super Bowl LVII and the FIFA Men’s World Cup and additional post-season NFL and Major League Baseball (“MLB”) content, as well as increased digital investment in Tubi and at FOX News Media. Partially offsetting this increase was the absence of TNF and lower entertainment marketing and production costs. Selling, general and administrative expenses increased 7% for fiscal 2023, as compared to fiscal 2022, primarily due to higher legal costs at FOX News Media and continued growth at Tubi.
Depreciation and amortization—Depreciation and amortization expense increased 13% for fiscal 2023, as compared to fiscal 2022, primarily due to an increase in broadcast production assets at FOX Sports,
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increased spending as a result of digital initiatives and the full year impact of the fiscal 2022 acquisitions of entertainment production companies.
Impairment and restructuring charges—See Note 4—Restructuring Programs to the accompanying Financial Statements.
Interest expense, net—Interest expense, net decreased 41% for fiscal 2023, as compared to fiscal 2022, primarily due to higher interest income as a result of higher interest rates.
Other, net—See Note 20—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 28% for fiscal 2023 was higher than the statutory rate of 21% primarily due to state taxes, a valuation allowance recorded against net operating losses and tax credits and other permanent items. The Company’s tax provision and related effective tax rate of 27% for fiscal 2022 was higher than the statutory rate of 21% primarily due to state taxes and a remeasurement of the Company’s net deferred tax assets associated with changes in the mix of jurisdictional earnings.
Net income—Net income increased 2% for fiscal 2023, as compared to fiscal 2022, primarily due to a gain recognized on the change in fair value of the Company’s investment in Flutter Entertainment plc and higher Segment EBITDA (as defined below), partially offset by legal settlement costs at FOX News Media (See Note 20—Additional Financial Information to the accompanying Financial Statements under the heading “Other, net”) and restructuring charges (See Note 4—Restructuring Programs to the accompanying Financial Statements).
Results of Operations—Fiscal 2022 versus Fiscal 2021
The following table sets forth the Company’s operating results for fiscal 2022, as compared to fiscal 2021:
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Selling, general and administrative (1,920) (1,807) (113) (6) %
Depreciation and amortization (363) (300) (63) (21) %
Impairment and restructuring charges — (35) 35 100 %
Less: Net income attributable to noncontrolling interests (28) (51) 23 45 %
** not meaningful
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Overview—The Company’s revenues increased 8% for fiscal 2022, as compared to fiscal 2021, due to higher affiliate fee, advertising and other revenues. The increase in affiliate fee revenue was primarily due to higher average rates per subscriber, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals, partially offset by a lower average number of subscribers. Also impacting the increase was the absence of prior year affiliate fee credits as a result of the COVID-19 related under-delivery of college football games. The increase in advertising revenue was primarily due to higher pricing at FOX Sports and FOX News Media, growth at Tubi, and a higher number of live events at FOX Sports due to the impact of COVID-19 in fiscal 2021. Partially offsetting this increase was lower political advertising revenue due to the absence of the 2020 presidential and congressional elections. The increase in other revenues was primarily due to higher sports sublicensing revenues which were impacted by COVID-19 in fiscal 2021, the impact of acquisitions of entertainment production companies in fiscal 2022 (See Note 3—Acquisitions, Disposals and Other Transactions to the accompanying Financial Statements) and higher FOX Nation subscription revenues, partially offset by the impact of the divestiture of the Company’s sports marketing businesses in fiscal 2021.
Operating expenses increased 13% for fiscal 2022, as compared to fiscal 2021, primarily due to higher sports programming rights amortization and production costs related to NFL, MLB and college football content, including a higher number of live events due to the impact of COVID-19 in fiscal 2021. Also impacting the increase was increased digital investment at Tubi and FOX News Media, costs associated with the launch of the United States Football League (“USFL”) and higher entertainment programming rights amortization due to more hours of original scripted programming as compared to fiscal 2021 which was impacted by COVID-19. This increase was partially offset by the absence of events that were shifted into fiscal 2021 from fiscal 2020 as a result of COVID-19 rescheduling, including National Association of Stock Car Auto Racing (“NASCAR”) Cup Series races and additional MLB regular season games, and the impact of the divestiture of the Company’s sports marketing businesses in fiscal 2021.
Selling, general and administrative expenses increased 6% for fiscal 2022, as compared to fiscal 2021, primarily due to higher technology costs related to the Company’s digital initiatives and higher marketing expenses at FOX News Media, partially offset by the impact of the divestiture of the Company’s sports marketing businesses in fiscal 2021.
Depreciation and amortization—Depreciation and amortization expense increased 21% for fiscal 2022, as compared to fiscal 2021, primarily due to assets placed into service during the fourth quarter of fiscal 2021 for the Company’s standalone broadcast technical facilities and the impact of acquisitions of entertainment production companies in fiscal 2022.
Impairment and restructuring charges—See Note 4—Restructuring Programs to the accompanying Financial Statements.
Interest expense, net—Interest expense, net decreased 5% for fiscal 2022, as compared to fiscal 2021, primarily due to the repayment of $750 million of senior notes in January 2022.
Other, net—See Note 20—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 27% for fiscal 2022 was higher than the statutory rate of 21% primarily due to state taxes and a remeasurement of the Company’s net deferred tax assets associated with changes in the mix of jurisdictional earnings. The Company’s tax provision and related effective tax rate of 25% for fiscal 2021 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.
Net income—Net income decreased 44% for fiscal 2022, as compared to fiscal 2021, primarily due to the change in fair value of the Company’s investment in Flutter Entertainment plc and the absence of the reimbursement from Disney of $462 million related to the substantial settlement of the Company’s prepayment of its share of the Divestiture Tax, which occurred during fiscal 2021 (See Note 20—Additional Financial Information to the accompanying Financial Statements under the heading “Other, net”).
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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, net, 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.
Fiscal 2023 versus Fiscal 2022
The following tables set forth the Company’s Revenues and Segment EBITDA for fiscal 2023, as compared to fiscal 2022:
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Other, Corporate and Eliminations 160 192 (32) (17) %
For the years ended June 30,
(in millions, except %) Better/(Worse)
Segment EBITDA
Other, Corporate and Eliminations (290) (326) 36 11 %
** not meaningful
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Cable Network Programming (41% and 44% of the Company’s revenues in fiscal 2023 and 2022, respectively)
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Selling, general and administrative (660) (586) (74) (13) %
Amortization of cable distribution investments 16 18 (2) (11) %
Revenues at the Cable Network Programming segment decreased for fiscal 2023, as compared to fiscal 2022, due to lower affiliate fee and advertising revenues, partially offset by higher other revenues. The decrease in affiliate fee revenue was primarily due to a decrease in the average number of subscribers, partially offset by higher average rates per subscriber, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals. The decrease in advertising revenue was primarily due to lower pricing in the direct response marketplace at FOX News Media, partially offset by the broadcast of the FIFA Men’s World Cup at the national sports networks in the current year. The increase in other revenues was primarily due to higher FOX Nation subscription revenues and higher sports sublicensing revenues.
Cable Network Programming Segment EBITDA decreased for fiscal 2023, as compared to fiscal 2022, due to the revenue decreases noted above and higher expenses. Operating expenses increased primarily due to higher sports programming rights amortization led by the broadcast of the FIFA Men’s World Cup, the renewed MLB contract and a higher volume of college football games at the national sports networks, and higher employee related costs and increased digital investment at FOX News Media. Selling, general and administrative expenses increased principally due to higher legal costs partially offset by lower marketing costs at FOX News Media and higher costs associated with the expansion of the USFL.
Television (58% and 55% of the Company’s revenues in fiscal 2023 and 2022, respectively)
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Selling, general and administrative (997) (907) (90) (10) %
** not meaningful
Revenues at the Television segment increased for fiscal 2023, as compared to fiscal 2022, due to higher advertising, affiliate fee and other revenues. The increase in advertising revenue was primarily due to revenues resulting from the broadcasts of Super Bowl LVII and the FIFA Men’s World Cup, continued growth at Tubi, higher political advertising revenue at the FOX Television Stations principally due to the November 2022 U.S.
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midterm elections, and additional NFL post-season games. Partially offsetting this increase was the absence of TNF and lower ratings at the FOX Network in the current year. 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. The increase in other revenues was primarily due to the full year impact of acquisitions of entertainment production companies in fiscal 2022.
Television Segment EBITDA increased for fiscal 2023, as compared to fiscal 2022, primarily due to the revenue increases noted above, partially offset by higher expenses. Operating expenses increased primarily due to higher sports programming rights amortization and production costs driven by the broadcast of Super Bowl LVII, NFL and MLB content, led by a higher volume of post-season games, and the broadcast of the FIFA Men’s World Cup, as well as increased digital investment in Tubi. Partially offsetting this increase was the absence of TNF and lower entertainment marketing and production costs. Selling, general and administrative expenses increased primarily due to continued growth at Tubi.
Other, Corporate and Eliminations (1% of the Company’s revenues for fiscal 2023 and 2022)
For the years ended June 30,
(in millions, except %) Better/(Worse)
Selling, general and administrative (392) (427) 35 8 %
Revenues at the Other, Corporate and Eliminations segment for fiscal 2023 and 2022 include revenues generated by Credible and the operation of the FOX Studio lot for third parties. Operating expenses for fiscal 2023 and 2022 include advertising and promotional expenses at Credible. Selling, general and administrative expenses for fiscal 2023 and 2022 primarily relate to employee costs, professional fees and the costs of operating the FOX Studio lot.
Fiscal 2022 versus Fiscal 2021
The following tables set forth the Company’s Revenues and Segment EBITDA for fiscal 2022, as compared to fiscal 2021:
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Other, Corporate and Eliminations 192 178 14 8 %
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For the years ended June 30,
(in millions, except %) Better/(Worse)
Segment EBITDA
Other, Corporate and Eliminations (326) (344) 18 5 %
Cable Network Programming (44% of the Company’s revenues in fiscal 2022 and 2021)
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Selling, general and administrative (586) (540) (46) (9) %
Amortization of cable distribution investments 18 22 (4) (18) %
Revenues at the Cable Network Programming segment increased for fiscal 2022, as compared to fiscal 2021, due to higher affiliate fee, advertising and other revenues. The increase in affiliate fee revenue was primarily due to contractual rate increases on existing affiliate agreements and from affiliate agreement renewals, partially offset by a lower average number of subscribers. Also impacting the increase was the absence of fiscal 2021 affiliate fee credits as a result of the COVID-19 related under-delivery of college football games. The decrease in the average number of subscribers was due to a reduction in traditional MVPD subscribers, partially offset by an increase in virtual MVPD subscribers. The increase in advertising revenue was primarily due to higher pricing at FOX News Media and higher pricing and an increase in the number of live events at the national sports networks, primarily the result of additional MLB postseason games and the return of a full college football schedule that was shortened due to COVID-19 in fiscal 2021. This increase was partially offset by lower political advertising revenue due to the absence of the 2020 presidential elections. The increase in other revenues was primarily due to higher sports sublicensing revenues, which were impacted by COVID-19 in fiscal 2021, and higher FOX Nation subscription revenues, partially offset by the impact of the divestiture of the Company’s sports marketing businesses in fiscal 2021.
Cable Network Programming Segment EBITDA increased for fiscal 2022, as compared to fiscal 2021, primarily due to the revenue increases noted above, partially offset by higher expenses. Operating expenses increased due to higher sports programming rights amortization and production costs primarily related to the return of a full college football and basketball season as a result of the impact of COVID-19 in fiscal 2021, increased investment in digital growth initiatives at FOX News Media and costs associated with the launch of USFL. This increase was partially offset by the absence of events that were shifted into fiscal 2021 from fiscal 2020 as a result of COVID-19 rescheduling, including NASCAR Cup Series races and additional MLB regular season games, and the impact of the divestiture of the Company’s sports marketing businesses in fiscal 2021. Selling, general and administrative expenses increased principally due to higher marketing expenses at FOX News Media, partially offset by the impact of the divestiture of the Company’s sports marketing businesses in fiscal 2021.
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Television (55% of the Company’s revenues in fiscal 2022 and 2021)
For the years ended June 30,
(in millions, except %) Better/(Worse)
Revenues
Selling, general and administrative (907) (831) (76) (9) %
Revenues at the Television segment increased for fiscal 2022, as compared to fiscal 2021, due to higher advertising, affiliate fee and other revenues. The increase in advertising revenue was primarily attributable to higher pricing as well as the return of a full schedule of college football in fiscal 2022 at FOX Sports and continued growth at Tubi, partially offset by lower political advertising revenue at the FOX Television Stations due to the absence of the 2020 presidential and congressional elections. 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. The increase in other revenues was primarily due to the current year impact of acquisitions of entertainment production companies.
Television Segment EBITDA decreased for fiscal 2022, as compared to fiscal 2021, as the revenue increases noted above were more than offset by higher expenses. Operating expenses increased primarily due to higher sports programming rights amortization and production costs related to NFL, MLB and college football content, including a higher number of college football games as compared to the COVID-19 impacted fiscal 2021, increased digital investment at Tubi and higher entertainment programming rights amortization due to more hours of original scripted programming as compared to fiscal 2021, which was impacted by COVID-19. Selling, general and administrative expenses increased primarily due to higher technology costs related to the Company’s digital initiatives.
Other, Corporate and Eliminations (1% of the Company’s revenues for fiscal 2022 and 2021)
For the years ended June 30,
(in millions, except %) Better/(Worse)
Operating expenses (91) (86) (5) (6) %
Selling, general and administrative (427) (436) 9 2 %
Revenues at the Other, Corporate and Eliminations segment for fiscal 2022 and 2021 include revenues generated by Credible and the operation of the FOX Studio lot for third parties. Operating expenses for fiscal 2022 and 2021 include advertising and promotional expenses at Credible and the costs of operating the FOX Studio lot. Selling, general and administrative expenses for fiscal 2022 and 2021 primarily relate to employee costs and professional fees and the costs of operating the FOX Studio lot.
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, net, Other, net and Income tax expense.
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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).
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.
Fiscal 2023 versus Fiscal 2022
The following table reconciles Net income to Adjusted EBITDA for fiscal 2023, as compared to fiscal 2022:
For the years ended June 30,
(in millions)
Add
Amortization of cable distribution investments 16 18
Depreciation and amortization 411 363
Impairment and restructuring charges 111 —
The following table sets forth the computation of Adjusted EBITDA for fiscal 2023, as compared to fiscal 2022:
For the years ended June 30,
(in millions)
Selling, general and administrative (2,049) (1,920)
Amortization of cable distribution investments 16 18
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Fiscal 2022 versus Fiscal 2021
The following table reconciles Net income to Adjusted EBITDA for fiscal 2022, as compared to fiscal 2021:
For the years ended June 30,
(in millions)
Add
Amortization of cable distribution investments 18 22
Depreciation and amortization 363 300
Impairment and restructuring charges — 35
The following table sets forth the computation of Adjusted EBITDA for fiscal 2022, as compared to fiscal 2021:
For the years ended June 30,
(in millions)
Selling, general and administrative (1,920) (1,807)
Amortization of cable distribution investments 18 22
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
The Company has approximately $4.3 billion of cash and cash equivalents as of June 30, 2023 and an unused five-year $1.0 billion unsecured revolving credit facility (See Note 9—Borrowings to the accompanying Financial Statements). The Company also has access to the worldwide capital markets, subject to market conditions. As of June 30, 2023, the Company was in compliance with all of the covenants under its 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; employee and facility costs; capital expenditures; acquisitions; income taxes, interest and dividend payments; debt repayments; legal settlements; and stock repurchases.
In addition to the acquisitions and dispositions disclosed within Note 3—Acquisitions, Disposals, and Other Transactions to the accompanying Financial Statements, 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.
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Sources and Uses of Cash—Fiscal 2023 vs. Fiscal 2022
Net cash provided by operating activities for fiscal 2023 and 2022 was as follows (in millions):
Net cash provided by operating activities $ 1,800 $ 1,884
The decrease in net cash provided by operating activities during fiscal 2023, as compared to fiscal 2022, was primarily due to legal settlement costs (See Note 14—Commitments and Contingencies to the accompanying Financial Statements), partially offset by higher Adjusted EBITDA, lower sports rights payments primarily due to the absence of TNF and lower entertainment programming costs.
Net cash used in investing activities for fiscal 2023 and 2022 was as follows (in millions):
Net cash used in investing activities $ (438) $ (513)
The decrease in net cash used in investing activities during fiscal 2023, as compared to fiscal 2022, was primarily due to the absence of acquisitions and dispositions, partially offset by an increase in capital expenditures and higher investments in equity securities.
Net cash used in financing activities for fiscal 2023 and 2022 was as follows (in millions):
Net cash used in financing activities $ (2,290) $ (2,057)
The increase in net cash used in financing activities during fiscal 2023, as compared to fiscal 2022,was primarily due to activity under the stock repurchase program, including the $1 billion accelerated share repurchase agreement (See Note 11—Stockholders’ Equity to the accompanying Financial Statements under the heading “Stock Repurchase Program”), partially offset by the absence of the $750 million repayment of senior notes that matured in January 2022.
Stock Repurchase Program
See Note 11—Stockholders’ Equity to the accompanying Financial Statements under the heading “Stock Repurchase Program.”
Dividends
Dividends paid in fiscal 2023 totaled $0.50 per share of Class A Common Stock and Class B Common Stock. Subsequent to June 30, 2023, the Company increased its semi-annual dividend and declared a semi-annual dividend of $0.26 per share on both the Class A Common Stock and the Class B Common Stock. The dividend declared is payable on September 27, 2023 with a record date for determining dividend entitlements of August 30, 2023.
Based on the number of shares outstanding as of June 30, 2023, and the new annual dividend rate stated above, the total aggregate cash dividends expected to be paid to stockholders in fiscal 2024 is approximately $260 million.
Sources and Uses of Cash—Fiscal 2022 vs. Fiscal 2021
Net cash provided by operating activities for fiscal 2022 and 2021 was as follows (in millions):
Net cash provided by operating activities $ 1,884 $ 2,639
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The decrease in net cash provided by operating activities during fiscal 2022, as compared to fiscal 2021, was primarily due to higher sports payments and entertainment production spending as well as lower Adjusted EBITDA.
Net cash used in investing activities for fiscal 2022 and 2021 was as follows (in millions):
Net cash used in investing activities $ (513) $ (528)
The decrease in net cash used in investing activities during fiscal 2022, as compared to fiscal 2021, was primarily due to lower capital expenditures in connection with establishing the Company’s standalone broadcast technical facilities placed into service in fiscal 2021, partially offset by higher fiscal 2022 acquisitions (See Note 3—Acquisitions, Disposals, and Other Transactions to the accompanying Financial Statements).
Net cash used in financing activities for fiscal 2022 and 2021 was as follows (in millions):
Net cash used in financing activities $ (2,057) $ (870)
The increase in net cash used in financing activities during fiscal 2022, as compared to fiscal 2021, was primarily due to the $750 million repayment of senior notes that matured in January 2022 and the absence of cash received from Disney in fiscal 2021, including the $462 million reimbursement related to the Divestiture Tax.
Debt Instruments
Borrowings include senior notes (See Note 9—Borrowings to the accompanying Financial Statements). During fiscal 2022, cash used in the repayment of borrowings was $750 Million for the 3.666% senior notes which matured and were repaid in full in January 2022.
Ratings of the Senior Notes
The following table summarizes the Company’s credit ratings as of June 30, 2023:
Rating Agency Senior Debt Outlook
Moody’s Baa2 Stable
Standard & Poor’s BBB Stable
Revolving Credit Agreement
In June 2023, the Company entered into an unsecured $1.0 billion revolving credit facility with a maturity date of June 2028 (See Note 9—Borrowings to the accompanying Financial Statements).
Commitments and Contingencies
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. For additional details on commitments and contingencies see Note 14—Commitments and Contingencies to the accompanying Financial Statements under the headings “Licensed Programming,” “Other commitments and contractual obligations” and “Contingencies.”
Pension and other postretirement benefits and uncertain tax benefits
The table in Note 14—Commitments and Contingencies to the accompanying Financial Statements excludes the Company’s pension and other postretirement benefits (“OPEB”) obligations and the gross unrecognized tax benefits for uncertain tax positions as the Company is unable to reasonably predict the ultimate amount and timing. The Company made contributions of $53 million and $59 million to its pension plans in fiscal 2023 and 2022, respectively. The majority of these contributions were voluntarily made to improve the funded status of the plans. Future plan contributions are dependent upon actual plan asset returns, interest
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rates and statutory requirements. Assuming that actual plan asset returns are consistent with the Company’s expected plan returns in fiscal 2024 and beyond and that interest rates remain constant, the Company would not be required to make any material contributions to its pension plans for the immediate future. Required pension plan contributions for the next fiscal year are not expected to be material but the Company may make voluntary contributions in future periods. Payments due to participants under the Company’s pension plans are primarily paid out of underlying trusts. Payments due under the Company’s OPEB plans are not required to be funded in advance, but are paid as medical costs are incurred by covered retiree populations, and are principally dependent upon the future cost of retiree medical benefits under the Company’s OPEB plans. The Company does not expect its net OPEB payments to be material in fiscal 2024 (See Note 15—Pension and Other Postretirement Benefits to the accompanying Financial Statements for further discussion of the Company’s pension and OPEB plans).
CRITICAL ACCOUNTING POLICIES
An accounting policy is considered to be critical if it is important to the Company’s financial condition and results of operations and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by management of the Company and the related disclosures have been reviewed with the Audit Committee of the Company’s Board of Directors. For the Company’s summary of significant accounting policies, see Note 2—Summary of Significant Accounting Policies to the accompanying Financial Statements.
Use of Estimates
See Note 2—Summary of Significant Accounting Policies to the accompanying Financial Statements under the heading “Use of Estimates.”
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company considers the terms of each arrangement to determine the appropriate accounting treatment.
The Company generates advertising revenue from sales of commercial time within the Company’s network programming, and from sales of advertising on the Company’s owned and operated television stations and various digital properties. Advertising revenue from customers, primarily advertising agencies, is recognized as the commercials are aired. Certain of the Company’s advertising contracts have guarantees of a certain number of targeted audience views, referred to as impressions. Revenues for any audience deficiencies are deferred until the guaranteed number of impressions is met, by providing additional advertisements. Advertising contracts, which are generally short-term, are billed monthly for the spots aired during the month, with payments due shortly thereafter.
The Company generates affiliate fee revenue from agreements with MVPDs for cable network programming and for the broadcast of the Company’s owned and operated television stations. In addition, the Company generates affiliate fee revenue from agreements with independently owned television stations that are affiliated with the FOX Network and receives retransmission consent fees from MVPDs for their signals. Affiliate fee revenue is recognized as we continuously make the network programming available to the customer over the term of the agreement. For contracts with affiliate fees based on the number of the affiliate’s subscribers, revenues are recognized based on the contractual rate multiplied by the estimated number of subscribers each period. For contracts with fixed affiliate fees, revenues are recognized based on the relative standalone selling price of the network programming provided over the contract term, which generally reflects the invoiced amount. Affiliate contracts are generally multi-year contracts billed monthly with payments due shortly thereafter.
The Company classifies the amortization of cable distribution investments (capitalized fees paid to MVPDs to facilitate carriage of a cable network) against affiliate fee revenue. The Company amortizes the cable distribution investments on a straight-line basis over the contract period.
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Inventories
Licensed and Owned Programming
The Company incurs costs to license programming rights and to produce owned programming. Licensed programming includes costs incurred by the Company for access to content owned by third parties. The Company has single and multi-year contracts for sports and non-sports programming. Licensed programming is recorded at the earlier of payment or when the license period has begun, the cost of the program is known or reasonably determinable and the program is accepted and available for airing. Advances paid for the right to broadcast sports events within one year and programming with an initial license period of one year or less are classified as current inventories, and license fees for programming with an initial license period of greater than one year are classified as non-current inventories. Licensed programming is predominantly amortized as the associated programs are made available. The costs of multi-year sports contracts are primarily amortized based on the ratio of each contract’s current period attributable revenue to the estimated total remaining attributable revenue. Estimates can change and, accordingly, are reviewed periodically and amortization is adjusted as necessary. Such changes in the future could be material.
Owned programming includes content internally developed and produced as well as co-produced content. Capitalized costs for owned programming are predominantly amortized using the individual-film-forecast-computation method, which is based on the ratio of current period revenue to estimated total future remaining revenue, and related costs to be incurred throughout the life of the respective program. Future remaining revenue includes imputed license fees for content used by FOX as well as revenue expected to be earned based on distribution strategy and historical performance of similar content. Changes to estimated future revenues may result in impairments or changes in amortization patterns. When production partners distribute owned programming on the Company’s behalf, the net participation in profits is recorded as content license revenue. The Company may receive government incentives in connection with the production of owned programming. The Company records government incentives as a reduction of capitalized costs for owned programming when the monetization of the incentive is probable. Government incentives were not material in fiscal 2023, 2022 and 2021.
Inventories are evaluated for recoverability when an event or circumstance occurs that indicates that fair value may be less than unamortized costs. The Company will determine if there is an impairment by evaluating the fair value of the inventories, which are primarily supported by internal forecasts as compared to unamortized costs. Where an evaluation indicates unamortized costs, including advances on multi-year sports rights contracts, are not recoverable, amortization of rights is accelerated in an amount equal to the amount by which the unamortized costs exceed fair value. Owned programming is monetized and tested for impairment on an individual basis. Licensed programming is predominantly monetized as a group and tested for impairment on a channel, network, or daypart basis. The recoverability of certain sports rights is assessed on an aggregate basis. The Company recognized impairments of approximately $10 million, $50 million, and nil in fiscal 2023, 2022 and 2021, respectively, related to owned programming at the Cable Network Programming and Television segments, which were recorded in Operating expenses in the Consolidated Statements of Operations.
Goodwill and Other Intangible Assets
The Company’s intangible assets include goodwill, Federal Communications Commission (“FCC”) licenses, MVPD affiliate agreements and relationships, software, trademarks and other copyrighted products.
The Company accounts for its business combinations under the acquisition method of accounting. The total cost of acquisitions is allocated to the underlying net assets acquired, based on their respective estimated fair values at the date of acquisition. Goodwill is recorded as the difference between the consideration transferred to acquire entities and the estimated fair values assigned to their tangible and identifiable intangible net assets and is assigned to one or more reporting units for purposes of testing for impairment. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. Identifying reporting units and assigning goodwill to them requires judgment involving the aggregation of business units with similar economic characteristics and the identification of existing business units that benefit from the acquired goodwill. The judgments made in determining the estimated fair value assigned to each class of intangible assets acquired, their reporting unit, as well as their useful lives can significantly impact net income. The Company allocates goodwill to disposed businesses using the relative fair value method.
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Carrying values of goodwill and intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company’s impairment review is based on a discounted cash flow analysis and market-based valuation approach that requires significant management judgment. The Company uses its judgment in assessing whether assets may have become impaired between annual valuations. Indicators such as unexpected adverse economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts, may signal that an asset has become impaired and require the Company to perform an interim impairment test.
The Company uses direct valuation methods to value identifiable intangibles for acquisition accounting and impairment testing. The direct valuation method used for FCC licenses requires, among other inputs, the use of published industry data that are based on subjective judgments about future advertising revenues in the markets where the Company owns television stations. This method also involves the use of management’s judgment in estimating an appropriate discount rate reflecting the risk of a market participant in the U.S. broadcast industry. The resulting fair values for FCC licenses are sensitive to these long-term assumptions and any variations to such assumptions could result in an impairment to existing carrying values in future periods and such impairment could be material.
During fiscal 2023, the Company determined that the goodwill and indefinite-lived intangible assets included in the accompanying Consolidated Balance Sheet as of June 30, 2023 were not impaired based on the Company’s annual assessments. The Company determined that there are no reporting units at risk of impairment as of June 30, 2023, and will continue to monitor its goodwill and indefinite-lived intangible assets for any possible future non-cash impairment charges.
See Note 2—Summary of Significant Accounting Policies to the accompanying Financial Statements under the heading “Annual Impairment Review” for further discussion.
Income Taxes
The Company is subject to income tax primarily in various domestic jurisdictions. The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining the Company’s tax expense and in evaluating its tax positions, including evaluating uncertainties.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
Employee Costs
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 measurement and recognition of costs of the Company’s pension and OPEB plans require the use of significant management judgments, including discount rates, expected return on plan assets and other actuarial assumptions.
For financial reporting purposes, net periodic pension expense is calculated based upon a number of actuarial assumptions, including a discount rate, an expected rate of return on plan assets and mortality. The Company considers current market conditions, including changes in investment returns and interest rates, in making these assumptions. The expected long-term rate of return is determined using the current target asset allocation of 35% equity securities, 55% fixed income securities and 10% in other investments, and applying expected future returns for the various asset classes and correlations amongst the asset classes. A portion of the fixed income investments is allocated to cash to pay near-term benefits.
The discount rate reflects the market rate for high-quality fixed income investments on the Company’s annual measurement date of June 30 and is subject to change each fiscal year. The discount rate assumptions
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used to account for pension and other postretirement benefit plans reflect the rates at which the benefit obligations could be effectively settled. The rate was determined by matching the Company’s expected benefit payments for the plans to a hypothetical yield curve developed using a portfolio of several hundred high-quality corporate bonds.
The key assumptions used in developing the Company’s fiscal 2023, 2022 and 2021 net periodic pension expense for its plans consist of the following:
(in millions, except %)
Discount rate for service cost 4.8 % 2.8 % 2.9 %
Discount rate for interest cost 4.5 % 2.1 % 2.2 %
Assets
Expected rate of return 5.0 % 5.1 % 6.5 %
Discount rates are volatile from year to year because they are determined based upon the prevailing rates as of the measurement date. The Company will utilize discount rates of 5.3% and 5.4% in calculating the fiscal 2024 service cost and interest cost, respectively, for its plans. The Company will use an expected long-term rate of return of 5.3% for fiscal 2024 based principally on the future return expectation of the plans’ asset mix. Changes in assumptions and differences between assumptions and actual experience has resulted in accumulated pre-tax net losses on the Company’s pension and postretirement benefit plans, which as of June 30, 2023 were $195 million as compared to $292 million as of June 30, 2022. These deferred losses are being systematically recognized in future net periodic pension expense. Unrecognized losses in excess of 10% of the greater of the market-related value of plan assets or the plans’ projected benefit obligation (“PBO”) are recognized over the average future service of the plan participants or average future life of the plan participants.
The Company made contributions of $53 million, $59 million and $63 million to its pension plans in fiscal 2023, 2022 and 2021, respectively. The majority of these contributions were voluntarily made to improve the funding status of the plans. Future plan contributions are dependent upon actual plan asset returns, statutory requirements and interest rate movements. Assuming that actual plan returns are consistent with the Company’s expected plan returns in fiscal 2024 and beyond and that interest rates remain constant, the Company would not be required to make any material statutory contributions to its pension plans for the immediate future. The Company will continue to make voluntary contributions as necessary to improve funded status.
Changes in net periodic pension expense may occur in the future due to changes in the Company’s expected rate of return on plan assets and discount rate resulting from economic events. The following table highlights the sensitivity of the Company’s pension obligations and expense to changes in these assumptions, assuming all other assumptions remain constant:
Changes in Assumption Impact on AnnualPension Expense Impact on PBO
Fiscal 2024 net periodic pension expense for the Company’s pension plans is expected to decrease to approximately $55 million primarily due to an increase in discount rates and asset gains during fiscal 2023.
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Legal Matters
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.
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:
•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 MVPDs;
•declines in advertising expenditures due to various factors such as the economic prospects of advertisers or the economy, major sports events and election cycles, evolving technologies and distribution platforms and related changes in consumer behavior and shifts in advertisers’ expenditures, the evolving market for AVOD advertising campaigns, and audience measurement methodologies’ ability to accurately reflect actual viewership levels;
•further declines in the number of subscribers to MVPD services;
•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;
•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; and 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, and the effects of any combination or significant acquisition, disposition or other similar transaction involving the Company;
•the loss of key personnel;
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•labor disputes, including current disputes and labor disputes involving professional sports leagues whose games or events the Company has the right to broadcast;
•lower than expected valuations associated with the Company’s reporting units, indefinite-lived intangible assets, investments or long-lived assets;
•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 failure to comply with laws, regulations, rules, industry standards or contractual obligations relating to privacy and personal data protection;
•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 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;
•unfavorable litigation outcomes or investigation results that require the Company to pay significant amounts or lead to onerous operating procedures;
•changes in GAAP or other applicable accounting standards and policies;
•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 and the indemnification arrangements entered into in connection with the Separation and the Transaction;
•the impact of COVID-19 and other widespread health emergencies or pandemics and measures to contain their spread; and
•the other risks and uncertainties detailed in Item 1A. “Risk Factors” in this Annual Report.
Forward-looking statements in this Annual Report 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to two types of market risk: changes in interest rates and stock prices. The Company neither holds nor issues financial instruments for trading purposes.
The following sections provide quantitative and qualitative information on the Company’s exposure to interest rate risk and stock price risk. The Company makes use of sensitivity analyses that are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.
Interest Rates
The Company’s current financing arrangements and facilities include $7.25 billion of outstanding fixed-rate debt, before adjustments for unamortized discount and debt issuance costs (See Note 9—Borrowings to the accompanying Financial Statements).
Fixed and variable-rate debts are impacted differently by changes in interest rates. A change in the interest rate or yield of fixed-rate debt will only impact the fair market value of such debt, while a change in the
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interest rate of variable-rate debt will impact interest expense, as well as the amount of cash required to service such debt. As of June 30, 2023, all the Company’s financial instruments with exposure to interest rate risk were denominated in U.S. dollars and no variable-rate debt was outstanding. Information on financial instruments with exposure to interest rate risk is presented below:
As of June 30,
(in millions)
Fair Value
Sensitivity Analysis
Stock Prices
The Company has common stock investments in publicly traded companies that are subject to market price volatility. Information on the Company’s investments with exposure to stock price risk is presented below:
As of June 30,
(in millions)
Fair Value
Total fair value of common stock investments $ 884 $ 435
Sensitivity Analysis
Concentrations of Credit Risk
See Note 2—Summary of Significant Accounting Policies to the accompanying Financial Statements under the heading “Concentrations of credit risk.”
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FOX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Management’s Report on Internal Control Over Financial Reporting 58
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) 59
Notes to the Consolidated Financial Statements 68
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Fox Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Fox Corporation;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;
•provide reasonable assurance that receipts and expenditures of Fox Corporation are being made only in accordance with authorization of management and directors of Fox Corporation; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Fox Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements. Also, the assessment of the effectiveness of internal control over financial reporting was made as of a specific date. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including the Company’s principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of Fox Corporation’s internal control over financial reporting as of June 30, 2023, based on the framework set forth in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management determined that, as of June 30, 2023, Fox Corporation maintained effective internal control over financial reporting.
Ernst & Young LLP, the independent registered public accounting firm who audited and reported on the Consolidated Financial Statements of Fox Corporation included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2023, has audited the Company’s internal control over financial reporting. Their report appears on the following page.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Fox Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Fox Corporation’s internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Fox Corporation (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Fox Corporation as of June 30, 2023 and 2022, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended June 30, 2023, and the related notes and our report dated August 11, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
August 11, 2023
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Fox Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fox Corporation (the Company) as of June 30, 2023 and 2022, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended June 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 11, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Program rights amortization – National sports programming
Defamation and disparagement claims
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/s/ Ernst & Young LLP
We have served as the Company's auditor since 2018.
New York, New York
August 11, 2023
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FOX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
For the years ended June 30,
Depreciation and amortization (411) (363) (300)
Impairment and restructuring charges (111) — (35)
Less: Net income attributable to noncontrolling interests (14) (28) (51)
Net income attributable to Fox Corporation stockholders $ 1,239 $ 1,205 $ 2,150
EARNINGS PER SHARE DATA
Net income attributable to Fox Corporation stockholders per share:
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FOX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS)
For the years ended June 30,
Other comprehensive income, net of tax:
Benefit plan adjustments and other 77 92 99
Other comprehensive income, net of tax 77 92 99
Less: Net income attributable to noncontrolling interests(a) (14) (28) (51)
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FOX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
As of June 30,
ASSETS
Current assets
Cash and cash equivalents $ 4,272 $ 5,200
Non-current assets
Property, plant and equipment, net 1,708 1,682
LIABILITIES AND EQUITY
Current liabilities
Borrowings $ 1,249 $ —
Accounts payable, accrued expenses and other current liabilities 2,514 2,296
Non-current liabilities
Redeemable noncontrolling interests 213 188
Commitments and contingencies
Equity
Class A Common Stock(a) 3 3
Class B Common Stock(b) 2 3
Accumulated other comprehensive loss (149) (226)
Total Fox Corporation stockholders’ equity 10,378 11,339
Noncontrolling interests 67 36
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FOX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
For the years ended June 30,
OPERATING ACTIVITIES
Adjustments to reconcile net income to cash provided by operating activities
Amortization of cable distribution investments 16 18 22
Impairment and restructuring charges 111 — 35
Change in operating assets and liabilities, net of acquisitions and dispositions
Receivables and other assets (104) (79) (269)
Inventories net of programming payable 145 (301) 190
Accounts payable and accrued expenses (68) (54) 282
INVESTING ACTIVITIES
Property, plant and equipment (357) (307) (484)
Acquisitions, net of cash acquired — (243) (51)
Proceeds from dispositions, net — 83 93
Purchase of investments (54) (28) (86)
Other investing activities, net (27) (18) —
Net cash used in investing activities (438) (513) (528)
FINANCING ACTIVITIES
Repayment of borrowings — (750) —
Non-operating cash flows from The Walt Disney Company — — 112
Settlement of Divestiture Tax Prepayment — — 462
Dividends paid and distributions (299) (307) (330)
Purchase of subsidiary noncontrolling interest — — (67)
Sale of subsidiary noncontrolling interest 35 25 —
Other financing activities, net (26) (25) (46)
Net cash used in financing activities (2,290) (2,057) (870)
Net (decrease) increase in cash and cash equivalents (928) (686) 1,241
Cash and cash equivalents, beginning of year 5,200 5,886 4,645
Cash and cash equivalents, end of year $ 4,272 $ 5,200 $ 5,886
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FOX CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(IN MILLIONS)
Common Stock Common Stock
Shares Amount Shares Amount
Other comprehensive income — — — — — — 99 99 — 99
Other comprehensive income — — — — — — 92 92 — 92
Other comprehensive income — — — — — — 77 77 — 77
The accompanying notes are an integral part of these Consolidated Financial Statements.
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FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Fox 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 Transaction