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.
35
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.
36
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.”
37
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,
38
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
39
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”).
40
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
41
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.
42
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 %
43
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.
44
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.
45
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
46
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.
47
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
48
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
49
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.
50
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.
51
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
52
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.
53
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;
54
•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
55
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.”
56
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
57
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.
58
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
59
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.
60
Program rights amortization – National sports programming
Defamation and disparagement claims
61
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2018.
New York, New York
August 11, 2023
62
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.
63
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.
64
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.
65
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.
66
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.
67
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
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 Informationunder 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.
Basis of Presentation
The Company’s financial statements as of and for the years ended June 30, 2023, 2022 and 2021 are presented on a consolidated basis.
68
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements are referred to as the “Financial Statements” herein. The consolidated statements of operations are referred to as the “Statements of Operations” herein. The consolidated statements of comprehensive income are referred to as the “Statements of Comprehensive Income” herein. The consolidated balance sheets are referred to as the “Balance Sheets” herein. The consolidated statements of cash flows are referred to as the “Statements of Cash Flows” herein. The consolidated statements of equity are referred to as the “Statements of Equity” herein.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Financial Statements include the accounts of all majority-owned and controlled subsidiaries. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met. All significant intercompany accounts and transactions within the Company’s consolidated businesses have been eliminated in consolidation.
Any change in the Company’s ownership interest in a consolidated subsidiary, where a controlling financial interest is retained, is accounted for as an equity transaction. When the Company ceases to have a controlling financial interest in a consolidated subsidiary, the Company recognizes a gain or loss in net income upon deconsolidation.
The Company’s fiscal year ends on June 30 (“fiscal”) of each year.
Reclassifications and Adjustments
Certain fiscal 2022 and 2021 amounts have been reclassified to conform to the fiscal 2023 presentation.
Use of Estimates
The preparation of the Company’s Financial Statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts that are reported in the Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less.
Receivables
Receivables are presented net of an allowance for credit losses, which is an estimate of amounts that may not be collectible. The allowance for credit losses is estimated based on historical experience, receivable aging, current expected collections, current economic trends and specific identification of certain receivables that are at risk of not being paid.
Receivables, net consist of:
As of June 30,
(in millions)
Allowance for credit losses (44) (54)
69
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Licensed and Owned Programming
The Company incurs coststo 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.
Investments
Investments in and advances to entities or joint ventures in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method. Significant influence generally exists when the Company owns an interest between 20% and 50%.
Equity securities in which the Company has no significant influence (generally less than a 20% ownership interest) with readily determinable fair values are accounted for at fair value based on quoted market prices. Equity securities without readily determinable fair values are accounted for either at fair value or using the measurement alternative which is at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. All gains and losses on investments in equity securities are recognized in the Statements of Operations.
Equity method investments are reviewed for impairment by comparing their fair value to their respective carrying amounts. The Company determines the fair value of its private company investments by considering available information, including recent investee equity transactions, discounted cash flow analyses, estimates based on comparable public company operating multiples and, in certain situations, balance sheet liquidation values. If the fair value of the investment has dropped below the carrying amount, management considers
70
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of time and extent to which the market value has been below cost, the financial condition and near-term prospects of the issuer of the security, the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value and other factors influencing the fair market value, such as general market conditions.
The Company regularly reviews equity securities not accounted for using the equity method or at fair value for impairment based on a qualitative assessment which includes, but is not limited to (i) significant deterioration in the earnings performance, credit rating, asset quality or business prospects of the investee, (ii) significant adverse changes in the regulatory, economic or technological environment of the investee and (iii) significant adverse changes in the general market condition of either the geographical area or the industry in which the investee operates. If an equity security is impaired, an impairment loss is recognized in the Statements of Operations equal to the difference between the fair value of the investment and its carrying amount.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided using the straight-line method over an estimated useful life of three to 40 years for buildings and leaseholds and three to 10 years for machinery and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of their useful lives or the life of the lease. Costs associated with the repair and maintenance of property are expensed as incurred. Changes in circumstances, such as technological advances, or changes to the Company’s business model or capital strategy, could result in the actual useful lives differing from the Company’s estimates. In those cases where the Company determines that the estimated useful life of property, plant and equipment should be shortened, the Company depreciates the asset over its revised remaining useful life, thereby increasing depreciation expense.
Goodwill and Other Intangible Assets
The Company’s intangible assets include goodwill, Federal Communications Commission (“FCC”) licenses, traditional and virtual multi-channel video programming distributor (“MVPD”) affiliate agreements and relationships, software and trademarks and other copyrighted products. Intangible assets other than goodwill acquired in business combinations are recorded at their estimated fair value 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. Amounts recorded as goodwill are assigned to more than one reporting unit as of the acquisition date when more than one reporting unit is expected to benefit from the synergies of the combination. The Company’s goodwill and indefinite-lived intangible assets, which primarily consist of FCC licenses, are tested annually for impairment, or earlier if events occur or circumstances change that would more likely than not reduce the fair value below its carrying amount. The impairment assessment of indefinite-lived intangibles compares the fair value of the assets to their carrying value. Intangible assets with finite lives are generally amortized over their estimated useful lives. The weighted average original amortization period of amortizable intangible assets is approximately 10 years.
Annual Impairment Review
Goodwill
Goodwill is tested for impairment at the reporting unit level, which is an operating segment, or one level below. If the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount after a qualitative assessment, the Company performs a quantitative impairment test to compare the fair value of each reporting unit to its carrying amount, including goodwill. In performing the quantitative assessment, the Company determines the fair value of a reporting unit primarily by using discounted cash flow analysis and market-based valuation approach methodologies. Determining fair value requires the exercise of significant judgments, including judgments about appropriate discount rates, long-term growth rates, company earnings multiples and relevant comparable transactions, as applicable, and the amount and timing of expected future cash flows. The cash flows employed in the analyses are based on the Company’s estimated outlook and various growth rates have been assumed for years beyond the long-term business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. In assessing the reasonableness of its determined fair values, the
71
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company evaluates its results against other value indicators, such as comparable public company trading values. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
FCC licenses
The Company performs impairment reviews by comparing the estimated fair value of the Company’s FCC licenses with their carrying amount on a station-by-station basis using a discounted cash flow valuation method, assuming a hypothetical start-up scenario for a broadcast station in each of the markets the Company operates in. The significant assumptions used are the discount rate and terminal growth rates and operating margins, as well as industry data on future advertising revenues in the markets where the Company owns television stations. These assumptions are based on actual third-party historical performance and estimates of future performance in each market.
During fiscal 2023, the Company determined that the goodwill and indefinite-lived intangible assets included in the 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.
Leases
The Company has lease agreements primarily for office facilities and other equipment. At contract inception, the Company determines if a contract is or contains a lease and whether it is an operating or finance lease. The Company does not separate lease components from nonlease components for real estate leases.
For operating leases that have a lease term of greater than one year, the Company initially recognizes operating lease liabilities and right-of-use (“ROU”) assets at the lease commencement date, which is the date that the lessor makes an underlying asset available for use by the Company. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the present value of the Company’s obligation to make lease payments, primarily escalating fixed payments, over the lease term. The discount rate used to determine the present value of the lease payments is generally the Company’s incremental borrowing rate because the rate implicit in the lease is generally not readily determinable. The incremental borrowing rate for the lease term is determined by adjusting the Company’s unsecured borrowing rate for a similar term to approximate a collateralized borrowing rate. The Company’s lease terms for each of its leases represents the noncancelable period for which the Company has the right to use an underlying asset, together with all of the following: (i) periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option; (ii) periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option; and (iii) periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term.
The Company’s operating ROU assets are included in Other non-current assets and the Company’s current and non-current operating lease liabilities are included in Accounts payable, accrued expenses and other current liabilities and Other liabilities, respectively, in the Company’s Balance Sheets (See Note 20—Additional Financial Information).
Long-Lived Asset Impairments
The Company periodically reviews the carrying amounts of its long-lived assets, including property, plant and equipment, ROU assets and finite-lived intangible assets, to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset or asset group is greater than the expected undiscounted cash flows to be generated by such asset or asset group, an impairment adjustment is recognized and is measured as the amount by which the carrying value of such asset or asset group exceeds its fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual
72
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less their costs to sell.
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 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.
Other revenue primarily includes revenue generated from the Company’s content licensing agreements and revenue from production services and rentals. Revenue from content licensing agreements is recognized when the content is made available under the content licensing agreements. Production services and rental revenues are recognized as the goods or services are delivered.
Advertising Expenses
The Company expenses advertising costs as incurred. The Company incurred advertising expenses of $680 million, $708 million and $558 million for fiscal 2023, 2022 and 2021, respectively.
Income taxes
The Company uses an asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are established where management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Earnings Per Share
Basic earnings per share for the Class A Common Stock and Class B Common Stock is calculated by dividing Net income attributable to Fox Corporation stockholders by the weighted average number of outstanding shares of Class A Common Stock, including vested restricted stock units (“RSUs”), and Class B Common Stock. Diluted earnings per share for the Class A Common Stock and Class B Common Stock is
73
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
calculated similarly, except that the calculation for the Class A Common Stock includes the dilutive effect of the assumed issuance of the shares issuable under the Company’s equity-based compensation plan.
Equity-Based Compensation
The Company applies a fair value-based measurement method in accounting for generally all share-based payment transactions with employees. The Company recognizes compensation cost for awards granted that have only service requirements and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. The Company accounts for forfeitures when they occur.
Financial Instruments
The carrying value of the Company’s financial instruments, such as cash and cash equivalents, receivables, payables and investments accounted for using the measurement alternative, approximates fair value. The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market.
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are presented outside of permanent equity on the Company’s Balance Sheets as their redemption is outside the control of the Company. The redeemable noncontrolling interests recorded are put rights held in Credible Labs Inc. (“Credible”) and an entertainment production company. The Company accretes the changes in the redemption value of the redeemable noncontrolling interests over the period from issuance to the earliest redemption date. If a redeemable noncontrolling interest is redeemable at fair value, adjustments to the carrying amount are recorded in retained earnings. If a redeemable noncontrolling interest is redeemable at an amount in excess of fair value, the portion of the adjustment that reflects a redemption in excess of fair value is presented within net income attributable to noncontrolling interests in the Statements of Operations.
Concentrations of Credit Risk
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
Generally, the Company does not require collateral to secure receivables. As of June 30, 2023, the Company had one customer that accounted for approximately 11% of the Company’s receivables. As of June 30, 2022, the Company had no individual customers that accounted for 10% or more of the Company’s receivables.
Recently Adopted, Recently Issued Accounting Guidance and Other
Inflation Reduction Act
In August 2022, the U.S. government enacted the Inflation Reduction Act which, among other changes, imposes a 15% corporate alternative minimum tax (“CAMT”) and a 1% excise tax on stock repurchases. Once subject to the CAMT, a taxpayer will compute both its CAMT liability and its regular federal tax liability and pay the higher of the two. To the extent that the CAMT liability exceeds the regular federal tax liability, a taxpayer will receive a credit (“CAMT credit”) which can be used against its regular federal tax liability in the future when the taxpayer is no longer subject to the CAMT. The CAMT credit does not expire. The CAMT is effective for tax years beginning after December 31, 2022, which means it will be applicable to the Company starting in fiscal 2024. The excise tax on stock repurchases applies to stock repurchases occurring after December 31, 2022.
The Company continues to evaluate the impact the CAMT will have on its financial statements but expects that, when applicable, the Company will be subject to the CAMT. The CAMT will impact the timing of the cash tax benefit the Company receives from the amortization of the additional tax basis received as a result of the Transaction Tax. This change in timing will result in an increase to the Company’s annual cash tax liability which could be material. However, as noted above, if the Company pays CAMT it will receive a CAMT credit that can be carried forward indefinitely and applied against its regular federal tax liability in future years. The
74
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company has been subject to the excise tax on stock repurchases occurring after December 31, 2022, but the impact to the financial statements is not material.
NOTE 3. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS
The Company’s acquisitions support the Company’s strategy to strengthen its core brands, grow its digital businesses and selectively enhance production capabilities for its digital and linear platforms. The Company records any noncontrolling interests in an acquiree at their acquisition date fair value. The initial accounting for a business combination, including the allocation of the consideration transferred, is based on provisional amounts. The amounts allocated to intangible assets and goodwill, the estimates of useful lives and the related amortization expense are subject to changes pending the completion of the final valuations of certain assets and liabilities. A change in the allocation of consideration transferred and any estimates of useful lives could result in a change in the value allocated to the intangible assets that could impact future amortization expense.
During fiscal 2023, the Company made no acquisitions. During fiscal 2022, the Company made acquisitions, primarily consisting of three entertainment production companies, for total cash consideration of approximately $240 million. During fiscal 2021, the Company made one acquisition consisting of a digital media company and disposed of its sports marketing businesses. The incremental revenues and Segment EBITDA (as defined in Note 17—Segment Information) related to the fiscal 2022 acquisitions and the fiscal 2021 acquisition and disposals, included in the Company's results of operations, were not material individually or in the aggregate.
NOTE 4. RESTRUCTURING PROGRAMS
During fiscal 2023, 2022 and 2021, the Company recognized restructuring charges of $111 million, nil and $35 million, respectively, which were recorded in Impairment and restructuring charges in the Statements of Operations. These charges were primarily comprised of severance costs at the Cable Network Programming, Television and Other, Corporate and Eliminations segments for fiscal 2023 and the Cable Network Programming segment for fiscal 2021.
Changes in the restructuring program liabilities were as follows:
One timeterminationbenefits Contractterminationcosts Total
(in millions)
As of June 30, 2023 and 2022, restructuring liabilities of $74 million and $16 million, respectively, were included in Accounts payable, accrued expenses and other current liabilities in the Balance Sheets with the remaining liability balances of $10 million and $11 million, respectively, included in Non-current Other liabilities in the Balance Sheets.
75
FOX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVENTORIES, NET
The Company’s inventories were comprised of the following:
As of June 30,
(in millions)
Licensed programming, including prepaid sports rights $ 720 $ 975
Less: current portion of inventories, net (543) (791)
Total non-current inventories, net $ 642 $ 521
Owned programming
The following table presents the aggregate amortization expense related to Inventories, net included in Operating expenses in the Statement of Operations:
For the years ended June 30,
(in millions)
Based on the balance of inventories, net as of June 30, 2023, the estimated amortization expense for each of the succeeding three fiscal years is as follows:
For the years ending June 30,
(in millions)
Estimated amortization expense $ 694 $ 123 $ 55
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. 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 Statements of Operations.
NOTE 6. FAIR VALUE