Fox 10-Q 2022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

or

Commission file number 001-38776

FOX CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code (212) 852-7000

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

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

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

As of October 28, 2022, 302,474,619 shares of Class A Common Stock, par value $0.01 per share, and 240,218,963 shares of Class B Common Stock, par value $0.01 per share, were outstanding.

FOX CORPORATION

FORM 10-Q

TABLE OF CONTENTS

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Readers should carefully review this document and the other documents filed by Fox Corporation (“FOX” or the “Company”) with the Securities and Exchange Commission (the “SEC”). This section should be read together with the unaudited interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K for the fiscal year ended June 30, (“fiscal”) 2022 as filed with the SEC on August 12, 2022 (the “2022 Form 10-K”). The unaudited consolidated financial statements are referred to as the “Financial Statements” herein.

INTRODUCTION

Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Company’s financial condition, changes in financial condition and results of operations. This discussion is organized as follows:

• Overview of the Company’s Business**—This section provides a general description of the Company’s businesses, as well as developments that occurred during the three months ended September 30, 2022 and 2021 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.

• Results of Operations**—This section provides an analysis of the Company’s results of operations for the three months ended September 30, 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 Resource****s**—This section provides an analysis of the Company’s cash flows for the three months ended September 30, 2022 and 2021, as well as a discussion of the Company’s outstanding debt and commitments, both firm and contingent, that existed as of September 30, 2022. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company’s future commitments and obligations, as well as a discussion of other financing arrangements.

• Caution Concerning Forward-Looking Statements**—This section provides a description of the use of forward-looking information appearing in this Quarterly Report on Form 10-Q, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such information is based on management’s current expectations about future events which are subject to change and to inherent risks and uncertainties. Refer to Part I., Item 1A. “Risk Factors” in the 2022 Form 10-K for a discussion of the risk factors applicable to the Company.

OVERVIEW OF THE COMPANY’S BUSINESS

The Company is a news, sports and entertainment company, which manages and reports its businesses in the following segments:

• Cable Network Programming**, which 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.

• 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.

Other Business Developments

On October 14, 2022, the Company announced that the Board of Directors (the “Board”) has formed a special committee composed of independent members of the Board (the “Special Committee”) to begin exploring a potential combination with News Corporation. The Special Committee has not made any determination at this time, and there can be no certainty that the Company will engage in such a transaction.

RESULTS OF OPERATIONS

Results of Operations—For the three months ended September 30, 2022 versus the three months ended September 30, 2021.

The following table sets forth the Company’s operating results for the three months ended September 30, 2022**,** as compared to the three months ended September 30, 2021:

Overview

The Company’s revenues increased 5% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, due to higher affiliate fee, advertising and other revenues. The increase in affiliate fee revenue was primarily due to higher average rates per subscriber and higher fees received from television stations that are affiliated with the FOX Network, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals, partially offset by a lower average number of subscribers. The increase in advertising revenue was primarily attributable to higher political advertising revenue at FOX Television Stations principally due to the November 2022 U.S. midterm elections, higher pricing at the FOX Network and FOX News Media and growth at TUBI, partially offset by lower ratings at the FOX Network. The increase in other revenues was primarily due to higher FOX Nation subscription revenues and the impact of acquisitions of entertainment production companies in fiscal 2022, partially offset by the timing of productions at our animation production company.

Operating expenses increased 5% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, primarily due to increased investment in digital growth initiatives at TUBI and FOX News Media, higher sports programming rights amortization and the impact of acquisitions of

entertainment production companies in fiscal 2022, partially offset by lower marketing costs at FOX Entertainment.

Selling, general and administrative expenses increased 8% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, primarily due to the impact of the fiscal 2022 acquisitions of entertainment production companies and higher employee related costs.

Depreciation and amortization—Depreciation and amortization expense increased 25% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, primarily due to increased spending as a result of digital initiatives and the impact of the fiscal 2022 acquisitions of entertainment production companies.

Other, net—See Note 11—Additional Financial Information to the accompanying Financial Statements under the heading “Other, net.”

Income tax expense—The Company’s tax provision and related effective tax rate of 27% for the three months ended September 30, 2022 was higher than the statutory rate of 21% primarily due to state taxes.

The Company’s tax provision and related effective tax rate of 26% for the three months ended September 30, 2021 was higher than the statutory rate of 21% primarily due to state taxes and other permanent items.

Net income—Net income decreased 13% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, primarily due to the absence of gains on the disposition of assets, an increase in the U.K Newspaper Matters Indemnity (See Note 11—Additional Financial Information to the accompanying Financial Statements under the heading “Other, net”), a lower gain recognized on the change in fair value of the Company's investment in Flutter Entertainment plc and lower Segment EBITDA (as defined below) at the Cable segment, partially offset by higher Segment EBITDA at the Television segment.

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.

The following tables set forth the Company’s Revenues and Segment EBITDA for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021:

Cable Network Programming (45% and 47% of the Company’s revenues for the first three months of fiscal 2023 and 2022, respectively)

Revenues at the Cable Network Programming segment increased 1% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, primarily due to higher advertising and other revenues. Affiliate fee revenue remained relatively consistent as higher average rates per subscriber, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals, were offset by a lower average number of subscribers. 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 partially offset by lower ratings and digital advertising revenue at FOX News Media, and the absence of the Confederation of North, Central America and Caribbean Association Football (“CONCACAF”) Gold Cup at the national sports networks during the current year quarter. The increase in other revenues was primarily due to higher FOX Nation subscription revenues.

Cable Network Programming Segment EBITDA decreased 4% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, as the revenue increases noted above were more than offset by higher expenses. Operating expenses increased primarily due to higher costs associated with increased investment in digital growth initiatives and breaking news coverage at FOX News Media, partially offset by lower sports programming rights amortization and production costs, including the absence of the CONCACAF Gold Cup at the national sports networks during the current year quarter.

Television (54% and 52% of the Company’s revenues for the first three months of fiscal 2023 and 2022, respectively)

Revenues at the Television segment increased 8% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, due to higher advertising, affiliate fee and other revenues. The increase in advertising revenue was primarily due to higher political advertising revenue at FOX Television Stations principally due to the November 2022 U.S. midterm elections, growth at TUBI, and higher sports pricing and the broadcast of additional Major League Baseball (“MLB”) regular season games partially offset by lower ratings at the FOX Network. 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 impact of the fiscal 2022 acquisitions of entertainment production companies, partially offset by the timing of productions at our animation production company.

Television Segment EBITDA increased 14% for the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, as the revenue increases noted above were partially offset by higher expenses. Operating expenses increased primarily due to increased digital investment at TUBI, higher sports programming rights amortization principally due to the renewed MLB contract and the impact of the fiscal 2022 acquisitions of entertainment production companies. Partially offsetting this increase were lower marketing and production costs. Selling, general and administrative expenses increased primarily due to the impact of the fiscal 2022 acquisitions of entertainment production companies and higher employee related costs.

Other, Corporate and Eliminations (1% of the Company’s revenues for the first three months of fiscal 2023 and 2022)

Revenues at the Other, Corporate and Eliminations segment for the three months ended September 30, 2022 and 2021 include revenues generated by Credible and the operation of the FOX Studio Lot for third parties. Operating expenses for the three months ended September 30, 2022 and 2021 include advertising and promotional expenses at Credible. Selling, general and administrative expenses for the three months ended September 30, 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.

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.

The following table reconciles Net income to Adjusted EBITDA for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021:

The following table sets forth the computation of Adjusted EBITDA for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

The Company has approximately $5.0 billion of cash and cash equivalents as of September 30, 2022 and an unused five-year $1.0 billion unsecured revolving credit facility (See Note 5—Borrowings to the accompanying Financial Statements). The Company also has access to the worldwide capital markets, subject to market conditions. As of September 30, 2022, the Company was in compliance with all of the covenants under the revolving credit facility, and it does not anticipate any noncompliance with such covenants.

The principal uses of cash that affect the Company’s liquidity position include the following: the acquisition of rights and related payments for entertainment and sports programming; operational expenditures including production costs; marketing and promotional expenses; expenses related to broadcasting the Company’s programming; employee and facility costs; capital expenditures; acquisitions; interest and dividend payments; debt repayments; and stock repurchases.

The Company has evaluated, and expects to continue to evaluate, possible acquisitions and dispositions of certain businesses and assets. Such transactions may be material and may involve cash, the Company’s securities or the assumption of additional indebtedness.

Sources and Uses of Cash

Net cash provided by operating activities for the three months ended September 30, 2022 and 2021 was as follows (in millions):

The increase in net cash provided by operating activities during the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, was primarily due to lower sports rights and income tax payments.

Net cash used in investing activities for the three months ended September 30, 2022 and 2021 was as follows (in millions):

The increase in net cash used in investing activities during the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, was primarily due to an increase in capital expenditures and higher investments in equity securities.

Net cash used in financing activities for three months ended September 30, 2022 and 2022 was as follows (in millions):

The decrease in net cash used in financing activities during the three months ended September 30, 2022, as compared to the corresponding period of fiscal 2022, was primarily due to the sale of a subsidiary non-controlling interest.

Stock Repurchase Program

See Note 6—Stockholders’ Equity to the accompanying Financial Statements under the heading “Stock Repurchase Program.”

Dividends

The Company declared a semi-annual dividend of $0.25 per share on both the Class A Common Stock and the Class B Common Stock during the three months ended September 30, 2022, which was paid on September 28, 2022 with a record date for determining dividend entitlements of August 31, 2022.

Debt Instruments

Borrowings include senior notes (See Note 9—Borrowings in the 2022 Form 10-K under the heading “Public Debt – Senior Notes Issued”).

Ratings of the Senior Notes

The following table summarizes the Company’s credit ratings as of September 30, 2022:

Revolving Credit Agreement

The Company has an unused five-year $1.0 billion unsecured revolving credit facility with a maturity date of March 2024 (See Note 5—Borrowings to the accompanying Financial Statements).

Commitments and Contingencies

See Note 8—Commitments and Contingencies to the accompanying Financial Statements.

Recent Accounting Pronouncements

See Note 1—Description of Business and Basis of Presentation to the accompanying Financial Statements under the heading “Recently Adopted, Recently Issued Accounting Guidance and Other.”

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; (v) the exploration of a potential combination with News Corporation; and (vi) 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 impact of COVID-19 and other widespread health emergencies or pandemics and measures to contain their spread and related weak macroeconomic conditions and increased market volatility;

• the impact of COVID-19 and other widespread health emergencies or pandemics specifically on the Company, including content disruptions that negatively affect the timing, volume or popularity of the Company’s programming, particularly sports programming, and potential non-cash impairment charges resulting from significant declines in the Company’s estimated revenues or the expected popularity of the Company’s programming;

• 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;

• labor disputes, including 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 (including changes in legislation currently being considered);

• the impact of any investigations or fines from governmental authorities, including Federal Communications Commission (“FCC”) rules and policies and FCC decisions regarding revocation, renewal or grant of station licenses, waivers and other matters;

• the failure or destruction of satellites or transmitter facilities the Company depends on to distribute its programming;

• unfavorable litigation 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 (as defined in Note 1—Description of Business and Basis of Presentation in the 2022 Form 10-K) and the indemnification arrangements entered into in connection with the Separation and the Distribution (each as defined in Note 1—Description of Business and Basis of Presentation in the 2022 Form 10-K); and

• the other risks and uncertainties detailed in Part I., Item 1A. ‘Risk Factors’ in the 2022 Form 10-K.

Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents that are incorporated by reference hereto speak only as of the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement made herein or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or to conform such statements to actual results or changes in our expectations, except as required by law.

There have been no material changes in the market risks reported in the 2022 Form 10-K.

**(a)**Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

**(b)**Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s first quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

See Note 8—Commitments and Contingencies to the accompanying Unaudited Consolidated Financial Statements of FOX under the heading “Contingencies” for a discussion of the Company’s legal proceedings.

There have been no material changes to the risk factors described in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, as filed with the Securities and Exchange Commission on August 12, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Below is a summary of the Company’s repurchases of its Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”), and Class B Common Stock, par value $0.01 per share (the “Class B Common Stock” and, together with the Class A Common Stock, the “Common Stock”), during the three months ended September 30, 2022:

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

Not applicable

(a) Exhibits.

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.